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2004
2009
Session document
FINAL
A6-0203/2007
4.6.2007
REPORT
on the crisis of the Equitable Life Assurance Society
(2006/2199(INI))
Committee of Inquiry into the crisis of the Equitable Life Assurance Society
Rapporteur: Diana Wallis
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This report was updated on 9.5.2007. It has taken into consideration evidence received up to 20.03.07: in
particular, it has analyzed written evidence up to WE 92, WE-File 33 and WE-CONF 32, and oral evidence up
to H 11, including WS 2.
We recall the abbreviations used in this report for evidence submitted to the Committee:
H # = oral evidence given at EQUI Hearings
WS # = oral evidence given at EQUI Workshops
WE # = written evidence posted on EQUI website (accessible to the public)
WE-FILE # = written evidence not posted on website
WE-CONF # = confidential written evidence
ES-# = external studies
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The Committee of Inquiry into the crisis of the Equitable Life Assurance Society started its
work on 2 February 2006 and adopted its final report on 8 May 2007. It met 17 times, held 11
public hearings, organized 2 workshops and sent 2 official delegations to Dublin and London.
Its coordinators met 12 times.
It heard oral evidence from 38 witnesses, analyzed 92 pieces of public written evidence, 32
pieces of confidential evidence and 33 pieces of filed evidence, totalling thousands of pages.
It also commissioned 3 external expert studies.
The 22 full Members and 15 substitute Members of the committee were:
McGuinness, Mairead : Chairwoman
Medina Ortega, Manuel : Vice-Chairman
Gauzès, Jean-Paul : Vice-Chairman
Sir Atkins, Robert : Member, coordinator
Bloom, Godfrey : Member
Bowles, Sharon : Member
Cashman, Michael : Member
De Rossa, Proinsias : Member, coordinator
Doorn, Bert : Member
Ettel, Harald : Member
Gargani, Giuseppe : Member
Klinz, Wolf : Member
Meyze Pleite, Willy : Member
Mote, Ashley : Member, coordinator
Ó Neachtain, Seán : Member, coordinator
Parish, Neil : Member
Purvis, John : Member
Rühle, Heide : Member, coordinator
Skinner, Peter: Member
Van Lancker, Anne : Member
Wallis, Diana : Member, Rapporteur, coordinator
Wieland, Rainer : Member
Audy, Jean-Pierre : Substitute
Aylward, Liam : Substitute
Beres, Pervenche : Substitute
van Buitenen, Paul : Substitute
Bullmann, Udo : Substitute
van den Burg, Ieke : Substitute
Chichester, Giles : Substitute
Dobolyi, Alexandra : Substitute
Gutiérrez-Cortines, Cristina : Substitute
Hasse Ferreira, Joel : Substitute
Karas,, Othmar : Substitute
Lehne, Klaus-Heiner : Substitute
Mitchell,, Gay : Substitute
Panayotopoulos-Cassiotou, Marie : Substitute
Radwan, Alexander : Substitute
The members of the secretariat were:
Director:Riccardo Ribera d'Alcala
Head of the Secretariat: Miguel Tell Cremades, Secretariat Nadine Froment
Administrator: Miguel Puente Pattison, Secretariat : Silvana Casella
Administrator: Hannes Kugi, Secretariat : Sylvie Renner-Yalcin
Administrator: Claudio Quaranta, Secretariat : Saskia de Rijck
Assistant: Amelia Fernandez Navarro
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PR_INI
CONTENTS
Page
PART I - INTRODUCTION ...................................................................................................... 9
I.
Summary of the mandate .............................................................................................. 11
II.
Lines of action in detail ................................................................................................ 12
III.
Historical background .................................................................................................. 17
IV.
Summary of actions undertaken ................................................................................... 20
PART II - TRANSPOSITION ................................................................................................. 31
I.
Introduction .................................................................................................................. 33
II.
Investigation into the correct transposition into UK law of the 3LD and its
application/implementation by UK authorities in relation to the ELAS ...................... 38
Conclusions PART II, TRANSPOSITION ............................................................................ 116
PART III - REGULATORY SYSTEM ................................................................................. 121
I.
Community Law Provisions ....................................................................................... 125
II.
The UK Life Insurance Regulatory System ............................................................... 134
III.
Key findings of the Penrose and Baird reports on Insurance Regulators ................... 142
IV.
Other Oral and Written Evidence considered by the Committee ............................... 158
Conclusions PART III - REGULATORY SYSTEM ............................................................. 199
PART IV - REMEDIES ......................................................................................................... 205
I.
Introduction ................................................................................................................ 209
II.
Damages ..................................................................................................................... 210
III.
Complaints to the UK regulators and official investigations ..................................... 214
IV.
Actions by ELAS in relation to aggrieved policyholders ........................................... 216
V.
Allegations of fraud and the UK Serious Fraud Office .............................................. 223
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VI.
Claims against ELAS for mis-selling ......................................................................... 225
VII.
Claims against the UK regulator ................................................................................ 245
VIII. The UK Financial Services Compensation Scheme and the decision not to close ELAS
.................................................................................................................................... 251
IX.
The position of non-UK policyholders ....................................................................... 253
X
Potential remedies for ELAS victims under EU law .................................................. 283
XI.
The case for a European class action lawsuit ............................................................. 300
XII.
The need to compensate Equitable Life victims ......................................................... 301
Conclusions PART IV - REMEDIES ................................................................................... 303
PART V - ROLE OF THE COMMISSION ........................................................................... 315
I.
Introduction ................................................................................................................ 317
II.
The implementation of EU legislation - general background .................................... 318
III.
The Commission's monitoring of implementation in practice ................................... 321
IV.
The need to ensure a comprehensive approach to implementation ............................ 330
Conclusions PART V, ROLE OF THE COMMISSION ....................................................... 335
PART VI - ROLE OF COMMITTEES OF INQUIRY .......................................................... 338
I.
The Committee of Inquiry: current situation. ............................................................. 340
II.
Limitations of the current status ................................................................................. 344
III.
ANNEX ...................................................................................................................... 347
Conclusions - PART VI, COMMITTEES OF INQUIRY ..................................................... 354
PART VII - RECOMMENDATIONS ................................................................................... 356
A.
RECOMMENDATIONS, PART II AND III - TRANSPOSITION AND
REGULATORY SYSTEM ........................................................................................ 358
B.
RECOMMENDATIONS, PART IV - REMEDIES ................................................... 360
C.
RECOMMENDATIONS, PART V - ROLE OF THE EUROPEAN COMMISSION
.................................................................................................................................... 363
D.
RECOMMENDATIONS, PART VI - ROLE OF COMMITTEES OF INQUIRY ... 367
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ANNEXES ............................................................................................................................. 368
ANNEX 1: EQUI TIMELINE ............................................................................................... 370
ANNEX 3: ARCHIVE OF EVIDENCE AND TRANSCRIPTS ........................................... 382
PROCEDURE ........................................................................................................................ 383
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PART I - INTRODUCTION
on the mandate and actions of the Committee of Inquiry
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INDEX PART I
I.
Summary of the mandate
II.
Lines of action in detail
III.
Historical background
IV.
Summary of actions undertaken
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I.
Summary of the mandate
On 18 January 2006, the European Parliament decided1 to set up a Committee of Inquiry of 22
members to investigate alleged contraventions or maladministration in the application of
Community law in relation to the collapse of the Equitable Life Assurance Society, without
prejudice to the jurisdiction of national or Community courts.
The concerns which led to the setting up of the committee had previously been raised via
several petitions to the European Parliament.2 These petitions formed the basis and starting
point of the inquiry and have helped focus its direction. It therefore was crucial to
acknowledge and maintain input from the petitioners and invite them to the committee's
meetings in order to set the scene. The central role of these particular petitions also reflects
the general importance of Parliament's Petitions Committee in monitoring the application of
Community law.
It is important to bear in mind that the scope of the inquiry is limited by the mandate, by
Article 193 of the EC Treaty and by the Decision of the Parliament, Council and Commission
on the exercise of the European Parliament's right of inquiry.3
According to the mandate, the committee's investigation was to focus on four key issues:
1) Investigation into alleged contraventions or maladministration in the application of
Directive 92/96/EEC by the UK;
2) Assessment of the UK regulatory regime in respect of Equitable Life;
3) Status of claims and adequacy of remedies available to policyholders;
4) Assessment of the Commission's monitoring of implementation.
Finally, the committee was required to "make any proposals that it deems necessary in this
matter."
With this scope in mind, the committee adopted on 23 March 2006 a Working Document on
the Lines of Action arising from the mandate (ref. 2006/2026(INI)). These lines of action are
set out in greater detail below. The approach was to separate the investigations at the Member
State-level on the one hand (transposition/implementation, regulation/supervision and redress
mechanisms) and to deal with the question of the Commission's role separately.
1Decision
of the European Parliament B6-0050/2006 of 18 January 2006, setting up a Committee of Inquiry into the collapse
of the Equitable Life Society, publication in OJ pending.
2 Petitions 0611/2004 by Arthur White (British) and 0029/2005 by Paul Braithwaite (British), on behalf of the Equitable
Members' Action Group (EMAG) and subsequent petitions on the same subject submitted by German and Irish petitioners.
3 Decision 95/167/EC, Euratom, ECSC of the European Parliament, the Council and the Commission of 19 April 1995 on
the detailed provisions governing the exercise of the European Parliament's right of enquiry, OJ L 113 19/5/1995, p.2.
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The four key issues set above were gradually developed through different preliminary draft
reports, starting with the present one, which focuses on the mandate and lines of action. In
the course of this process, an interim report on the investigation, presented to Parliament in
July 2006, in accordance with the Decision setting up the Committee of Inquiry, summarized
the work undertaken at that point in time.
It is important to bear in mind that the inquiry has set itself apart from previous and ongoing
national investigations by adopting a European perspective. In order to achieve this, the
analysis was done in a comparative way, including the UK, Germany, Ireland and at least one
other Member State with a well developed financial services industry, such as the
Netherlands or Spain.
II.
Lines of action in detail
1) Investigation into alleged contraventions or maladministration in the application of
Directive 92/96/EEC by the UK
One of the core tasks of the committee was to examine whether Directive 92/96/EEC, the
Third Life Directive (3LD)1, was correctly transposed and properly implemented at the
national level in the UK by its competent authorities. The main elements of this line of action
are covered in Part II of this report.
To do this, the committee was firstly called upon to analyse the overall EU legislative and
regulatory framework for the insurance sector and clarify which provisions apply to Equitable
Life's situation. In addition to looking at the UK, the committee carried out a comparative
analysis, identifying the provisions of national law intended to give effect to the requirements
of the Directives, and examined whether these requirements were transposed in a full and
timely manner.
Secondly, the committee was called upon to examine whether the application of the Directive
by the different UK authorities was in conformity with EU legislation. It tried to clarify the
respective responsibilities of the various financial authorities involved in the supervision of
Equitable Life during the reference period. Detailed investigations were carried out to
establish by whom, when and how Equitable Life's solvency, as well as its accounting and
provisioning practices, were supervised and how authorities responded to potential
weaknesses.
As far as the period covered is concerned, the mandate mentions that it should begin with the
entry into force of the Third Life Directive (3LD), 1 July 1994, and should end with the
events that occurred at Equitable Life, i.e., 1999-2001. Nevertheless, for the purposes of the
inquiry, it was necessary to analyze events before 1994, both in terms of the First and Second
1
Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and administrative provisions
relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (third life assurance Directive), OJ L
311 , 14/11/1997, p.34.
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Life Directives (1LD1 and 2LD2) as well as the whole adoption process of the 3LD before
1994.
2) Assessment of the UK regulatory regime in respect of Equitable Life
The main elements of this line of action are covered in Part IV of the final report.
Although this part of the mandate called for a wide-ranging investigation, the standards of
conduct to examine are related to Community law, since otherwise the committee would
exceed its limits as fixed by Article 193 EC. Furthermore, it appeared appropriate to compare
the UK regime with regulatory approaches in Ireland, Germany and another EU Member
States. In short, the committee was called upon to examine how UK regulatory practice in
respect of ELS compares when judged against its peers in an EU environment. The Penrose
report3, which overlaps with parts of this investigation, was taken as a starting point and then
considered in a wider European context. In addition, the committee needed to take into
account the ongoing investigation by the UK Parliamentary and Health Service Ombudsman
"to determine whether the relevant domestic regulatory regime was properly administered".
The release of that report is expected in mid-2007.
According to the Decision setting up the Committee of Inquiry, the reference period for this
line of investigation goes back "at least" to 1989 and is thus wider than the reference period
for point 1.
3) Status of claims and adequacy of remedies available to policyholders
The main elements of this line of action are covered in Part IV of the final report. Firstly, it
was necessary to determine the number of non-UK European citizens affected and to clarify
the circumstances under which they acquired Equitable Life policies (i.e., when they
purchased them, whether they purchased them within or outside the UK, directly or through
intermediaries, etc.).
Secondly, information was to be collected as to the magnitude of the financial damage caused
to non-UK policyholders and possible actions they might have undertaken to obtain
compensation. In addition, the committee was to clarify the potential legal obligations and
constraints for the authorities of those Member States in whose territory the policies were sold
1
First Council Directive 79/267/EEC of 5 March 1979 on the coordination of laws, regulations and administrative provisions
relating to the taking up and pursuit of the business of direct life assurance, OJ L 063 , 13/03/1979 P. 0001 - 0018; Second
Council Directive 90/619/EEC of 8 November 1990 on the coordination of laws, regulations and administrative provisions
relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide services and
amending Directive 79/267/EEC, OJ L 330 , 29/11/1990 p.50.
2
Second Council Directive 90/619/EEC of 8 November 1990 on the coordination of laws, regulations and administrative
provisions relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide
services and amending Directive 79/267/EEC, OJ L 330 , 29/11/1990 p.50.
The Treasury set up Lord Penrose’s inquiry in August 2001. The terms of reference were: “To enquire into the
circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life
market background; to identify any lessons to be learnt for the conduct, administration and regulation of life assurance
business; and to give a report thereon to Treasury Ministers.” The report of the Equitable Life inquiry was published
on 8 March 2004.
3
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(e.g. Ireland or Germany), what they did, and to what extent they had any control on the
situation. This line of investigation is connected to the principle of "single official
authorization" and "home State" control contained in the 3LD.1
The committee subsequently examined the system of legal remedies available for those
policyholders. Two scenarios were possible depending on the results of the committee's
investigations under points 1 and 2. Should the UK regulatory system be found to have been
in conformity with EU law, the committee would nevertheless need to look into the possibility
of policyholders being able to claim damages under UK law, as well as the possibility of EU
citizens from other Member Sates encountering particular difficulties in that regard. If the UK
was found to be violating EU law, the committee could also focus on the system of judicial
protection under EU law. Member States are obliged to make good loss and damage caused to
individuals by breaches of Community law for which they can be held responsible according
to criteria developed by the Court of Justice. These questions needed to be further clarified by
evaluating whether domestic courts are adequately equipped to protect this right to reparation
or whether different remedial standards exist in different Member States.
4.) Assessment of the Commission's monitoring of implementation
The main elements of this line of action are covered in Part III of the final report. The
committee was called upon to examine the way in which the Commission monitored the
transposition of the relevant Directives by the UK. Firstly, it was necessary to establish
whether the Commission considered the implementing legislation notified to it by the UK
authorities to be in compliance with Community law from the outset or whether it had initially
identified any shortcomings and subsequently requested further clarifications. In addition, it
was necessary to ascertain whether the Commission ever started infringement proceedings or
if it investigated any related complaints by citizens.
The Commission's performance in monitoring transposition was to be measured both against
its legal obligations under the Treaty and in terms of its political responsibility. If the
committee were to find that the UK did not comply with EU legislation, a further task under
this part of the mandate would be to assess whether the situation might have been avoided had
the Commission fulfilled its obligation to monitor transposition.
Specific actions arising from the list of actions and investigations as adopted by the
Committee of Inquiry in its Working Document of 23 March 2006
1)
Hearing of relevant witnesses before the committee:
-
Hearing of petitioners and affected policyholders;
Invitation of Lord PENROSE and the UK Parliamentary Ombudsman;
Invitation of senior decision-makers from UK Treasury;
Invitation of Commissioner McCREEVY and the Director General of DG MARKT;
Invitation of the Equitable Life Assurance Society's current management;
Invitation of Financial Regulators from the UK, Ireland and Germany;
1
Recitals 6, 7 and Article 8.
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2) UK market analysis:
-
-
Overall background analysis of the UK life assurance market, as well as of Equitable Life
as a company (history, state-of-play, prospects) and the events surrounding the collapse of
Equitable Life;
Background analysis of EU legislative and regulatory framework in relation to Equitable
Life;
Clarification of UK authorities' respective competences with regards to the supervision of
Equitable Life;
3) Comparative market analysis:
-
-
Analysis of the Penrose report in the light of EU requirements and of regulatory standards
in other Member States;
Comparative analysis of transposition in the UK and other Member States, with regard to
the supervision of insurance undertakings, using "table of transposition" (study
commissioned through the committee's "Expertise Budget"),
Comparative study (in connection with the study on transposition) on regulatory
approaches in the UK and other EU Member States;
Examination of communication and cooperation between the regulatory bodies in the
different Member States, especially the UK, Germany and Ireland;
Comparative study of the remedies available under UK and EU law for policyholders
from the UK and other Member Sates (external study commissioned under the
committee's "Expertise Budget");
4) Investigation:
-
-
Gather information about the number of affected policyholders from the UK and non-UK
Member States and the magnitude of damages suffered;
Determine status of policyholders' claims;
Fact-finding missions to UK, Ireland and Germany to meet petitioners and representatives
of financial authorities, and/or hearing of competent authorities in order to establish if the
relevant provisions were properly applied;
Request information and documentation from the Commission regarding:
 the transposition of the relevant Directives and their application by competent
authorities during the reference period;
 actions taken by the Commission with regard to monitoring implementation;
 the monitoring of the transposition of the Third Directive in the UK, including
relevant correspondence with the UK authorities.
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Summary of the approach proposed by the Rapporteur
in the Working Document of 23 March 2006
1- Contravention or
maladministration in the
application/implementation
of the 3rd life Directive
2- Failure of UK regulation:
adequacy of the level of
supervision, as required by
the Directive
3- Status of claims by nonUK citizens and adequacy
of system of remedies for
prejudice available to
policyholders
Q: How did you implement?
UK (e.g. Treasury, DTI)
Germany
Ireland
Spain /Netherlands
Q: How did you or would you have regulated?
UK (e.g. FSA, PIA, GAD)
Germany
Ireland
Spain/ Netherlands
Other State?
Q: What mechanisms are/were available
to claimants in your country?
UK
Germany
Ireland
Spain / Netherlands
Other State?
Conducting this research will then assist in responding to the related issue concerning the
Commission:
4- Commission’s failure or
not to fulfil its functions
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III.
Historical background
History
In 1762, the Equitable Life Assurance Society was created as the first mutual life assurance
company and is still the oldest mutual life assurance company in the UK. For the next 200
years, it established itself as a reputable and trusted provider of pension products. Its success
is partly based on its reputation, its strategy of paying no commissions to insurance agents or
independent advisers and its tactic of always keeping reserves low and returning to its
members more money than other companies. During the 1950s, Equitable began selling socalled GAR1 (“guaranteed annuity rate”) policies alongside its other pension products. GARs
guarantee investors a minimum annuity rate when they retire. It can be argued that the
company's troubles start here: a guaranteed pension for life means predicting how long people
will live and the level of interest rates for up to 40 years into the future. Equitable did not
correctly predict the increase in life expectancy of the general population nor the historical
fall in interest rates; thus, a time-bomb started ticking the moment GARs were introduced,
with the firm consistently under-reserving for the guaranteed annuities throughout the whole
period and creating an ever-increasing asset shortfall.
Despite experiencing a period of rapid growth in the 1990's based on the long bull market of
that decade, as interest rates begin to fall it became increasingly expensive for ELS to honour
its policies. Throughout this period, the ELS management still continued to devise innovative
products that continued to attract new policyholders, most notably a new type of with-profits
fund, where part of the benefits are guaranteed but the final bonus depends on future market
performance. However, as the expansion stopped, the firm realized the extent of its asset
shortfall and decided to pay newly retired people less than the guaranteed amount: in 1994,
ELS announced plans to cut the size of the final bonuses paid to its 90,000 GAR
policyholders, which was immediately challenged in court by some of the policyholders
affected. At the same time, the Society's with-profits business came under close scrutiny in
the press.
After a long legal battle, with subsequent appeals from both sides, the UK House of Lords
ruled in 2000 that the Society's approach was inappropriate and that it must meet its
obligations to its GAR policyholders. As a result, the already existing asset shortfall situation
worsened (£1.5 billion) and the company decided to put itself up for sale. However, initial
potential purchasers withdrew at the last minute. On 8 December 2000 the Society closed its
doors to new business and a new Board was appointed. In 2001, the new Board cancelled
interim bonuses and cut all (£4 billion) pension policy values by 16% (14% for life policies).
Before the end of 2001, the new Board further proposed a compromise scheme to
policyholders to change the status of GAR and non-GAR investments, a scheme which was
sanctioned by the UK High Court on 8 February 2002.
1
See Glossary in Annex for explanation of technical terminology.
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In the face of all these developments, several investigations at the UK level started one after
the other: in March 2001 the House of Commons Treasury Select Committee published its
'Equitable Life and the Life Assurance Industry: an Interim Report'; in August 2001 Lord
Penrose started his wide-ranging investigation; in September 2001 the Corley Report into
Equitable Life was published; in October 2001 the Baird Report into regulatory handling of
Equitable Life was published. In April 2002 the Society tried to sue its former auditor, Ernst
& Young, and 15 former directors but the action was ultimately unsuccessful.
In June 2003, the UK parliamentary Ombudsman issued a report finding prudential regulators
not guilty of maladministration. In March 2004, the Penrose report was published. It stated in
essence that, despite having identified some serious regulatory failings in the way the firm
was supervised, the balance of blame lay more with ELS' management than with the
regulators. Later the same year, the first petitions on the case reached the European
Parliament's Committee on Petitions. The petitioners argued that UK regulators failed to
supervise adequately the Society's ability to meet its regulatory financial requirements and
that the actions and omissions of the past regulators were in breach of UK rules and the
corresponding EU life insurance Directives. On 18 January 2006, Parliament decided to set up
the Committee of Inquiry into the Crisis of the Equitable Life Assurance Society (EQUI)
committee, which held its constituent meeting on 2 February 2006.
Main figures and policies
At the height of its business in 2001, the number of with-profits policyholders affected by the
policy cut was close to one million, mostly in the UK. If non with-profits policyholders are
included, up to 1.7 million policyholders were affected, according to some estimates. Today,
the with-profits fund, worth £10 billion, still has about 600,000 members. It is estimated that
some 15,000 policies had been sold in Germany, the Irish republic and other non-UK Member
States by the time of the closure of ELS to new business in 2001. Currently there would
appear to be 8,300 with-profits policyholders remaining in Ireland and some 4,000 in
Germany.
Types of policies
Before describing what type of products were sold by ELS, it is perhaps useful to clarify for
the layman what an annuity is. In essence, it is an insurance product that provides a series of
periodic payments that are guaranteed as to amount and payment period. If a person chooses
to take the annuity payments over his or her lifetime, the person will have a guaranteed source
of income until his death. If he dies before his life expectancy, he will get back from the
insurer far less than was paid in. On the other hand, if he outlives his life expectancy, he
might get back far more than the cost of the annuity plus earnings. Usually, the earnings that
occur during the term of the annuity are tax-deferred (i.e., they are not taxed until they are
paid out). The following are different types of annuity products, with an indication of the
types of policies sold by the Society and the outstanding amounts1:


1
Single-Premium Annuities: the investment is made all at once
Flexible-Premium Annuities: the annuity is funded with a series of payments
For more detail see WE 28.
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



Immediate Annuities: it starts payments right after the annuity is funded, usually with a
single premium
Deferred Annuities: with this type of annuity, payouts begin many years after the annuity
contract is issued. Scheduled payments can be received either in a lump sum or as an
annuity. They may be funded with a single or flexible premium
Fixed Annuities or GAR Annuities: with a fixed annuity contract, the insurance company
puts funds into conservative fixed income investments such as bonds, and the principal is
guaranteed. The company gives the policyholder an interest rate that is guaranteed for a
certain minimum period. This guaranteed annuity rate (GAR) is adjusted upwards or
downwards at the end of the guarantee period. ELS still has fixed annuity business of
around £5billion
Variable Annuities: the variable annuity carries higher risks than the GAR fixed annuity.
It gives the purchaser the ability to choose how to allocate his money among several
different managed funds. Unlike the fixed annuity, there are no guarantees of principal or
interest. Thus, the investment is taken by the annuitant who bears the risk, not the
insurance company. ELS sold a type of variable annuity called a with-profit annuity, a
policy that received a share of the distributed surplus from the relevant fund by way of
bonuses. ELS wrote the bulk of its with-profit annuity contracts in the 1990s when
investment returns were high. The Society’s financial problems and the stock market fall
of 2000-2003 resulted in a material cut of about one-third of the with-profit annuities. This
was also compounded by the matter of the so-called Guaranteed Interest Rate (‘GIR’), an
amount by which basic benefits are guaranteed to increase each year before the addition of
a declared bonus. It is estimated that GIR probably still applies to about 75% of withprofit policies of ELS. Those policies with GIR benefit from a 3.5% guaranteed annual
increase. The overall effect of the GIR is that ELS is locked into investment in
government stocks and loans, which can barely produce a 3.5% annual return. This has
meant that the Society has not benefited much from the stock market recovery of 20032005. The ELS with-profits fund is currently estimated to be worth £10 billion.
The functioning of a with-profits fund in detail
Funds are invested - whether in equities, bonds, gilts and property - depending on the fund
and its investment objectives. The intention of with-profits is to give relatively cautious
investors a taste of the stock market but without too much risk. In return for monthly
premiums, the company promises to pay a lump sum at the end of the policy's term. Investors'
premiums are paid into a central fund with those of other "with-profits" investors. A large part
of the policy's final value depends on bonuses paid by the firm during the investment period
and when the policy matures. To safeguard the funds' strength, financial penalties are also
imposed on savers who wish to withdraw their money early. With-profits funds also have an
in-built safety mechanism known as "smoothing". This means that in years of good
investment growth companies should hold back profits and use them to top up bonuses in
years when economic conditions are harsher.
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IV.
Summary of actions undertaken
Actions taken and evidence analysed so far
1.
Hearing of relevant witnesses before Committee
During its meetings on 23 March 2006, 25 April 2006, 29 May 2006, 21 June 2006, 11 July
2006, 13 September 2006, 4 October 2006, 23 November 2006, 19 December 2006, 25
January 2007 and 1 February 2007, the Committee of Inquiry heard testimonies of several
witnesses, including Equitable Life policyholders, who had previously petitioned the
European Parliament, other policyholders from the UK, Ireland and Germany, representatives
of the UK, Irish, German and Swiss governments, the European Commission and the current
chief executive of Equitable Life. The following witnesses provided oral evidence:
Meeting of 23 March 2006 (oral evidence H1):
-
Tom LAKE, Chairman of the Equitable Members' Action Group
Paul BRAITHWAITE, General Secretary of the Equitable Members' Action Group,
(petitioner)
Elemér TERTÁK, European Commission DG Markt, Director for Financial Institutions
Karel VAN HULLE, European Commission, DG Markt, Head of the Insurance and
Pensions Unit
Alan BEVERLY, European Commission, DG Markt, Insurance and Pensions Unit
Meeting of 25 April 2006 (oral evidence H2):
-
Michael JOSEPHS, Adviser to Investor's Association
Beatrice KNOWD, Irish policyholder
Patrick KNOWD, Irish policyholder
Nicolas BELLORD, policyholder (petitioner)
Paul WEIR, Chairman of the Late Contributors Action Group
Charles THOMSON, Chief Executive Officer, Equitable Life Assurance Society
Meeting of 29 May 2006 (oral evidence H3):
-
-
Peter SCAWEN, Equitable Life Trapped Annuitants (ELTA) group
Markus J. WEYER, DAGEV (Deutsche Arbeitsgemeinschaft der Equitable Life
Versicherungsnehmer), association representing the interest of policyholders who
underwrote Equitable Life policies in Germany
Martin McELWEE, author of the Leviathan report
Meeting of 21 June 2006 (oral evidence H4):
-
Clive MAXWELL, Director for Financial Services Policy at HM Treasury
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-
-
David STRACHAN, Director for the insurance sector at the Financial Services Authority
(FSA)
Christopher DAYKIN, Government Actuary, Head of the GAD (Government Actuary's
Department)
Mary O'DEA, Consumer Director, Anne TROY, Head of insurance supervision, at the
Irish Financial Services Regulatory Authority (ISFRA), and George TREACY, Head of
Consumer Protection Codes at the Irish Financial Services Regulatory Authority (IFSRA)
Colin SLATER, accountant and partner at Burgess Hodgson.
Meeting of 11 July 2006 (oral evidence H5):
-
Richard LLOYD, Equitable Life Assurance Society ex-sales representative
Stuart BAYLISS, managing director of Annuity Direct
Meeting of 13 September 2006 (oral evidence H6):
-
Thomas STEFFEN, First Director for Insurance Supervision of the German Financial
Services regulator (BaFin) (Bundesanstalt für Finanzdiensleistungsaufsicht)
Kurt SCHNEITER, Member of the Board of the Swiss Federal Office of Private Insurance
Meeting of 4 October 2006 (oral evidence H7):
-
Mr BJERRE-NIELSEN, Chairman of CEIOPS, the Committee of European Insurance and
Occupational Pensions Supervisors
Liz KWANTES, head of the Equitable Life Members Help Group
Leslie SEYMOUR, a Brussels-based ELS policyholder
Meeting of 23 November 2006 (oral evidence H8):
-
Charles THOMSON, Chief Executive Officer, Equitable Life Assurance Society
Simon BAIN, journalist from the Glasgow Herald
Charlie MCREEVY, European Commissioner for the Internal Market
Meeting of 19 December 2006 (oral evidence H9):
-
Eric DUCOULOMBIER, representative for FIN-NET
Meeting of 25 January 2007 (oral evidence H10):
-
Claire-Françoise DURAND, Deputy Director General of the Legal Service of the
European Commission
Jacqueline MINOR, Director of Directorate B (Horizontal Policy Development) of DG
MARKT
Michel AYRAL, Director of Directorate C (Regulatory Policy) of DG ENTR
Julio GARCIA-BURGUES, Head of Unit A.2 (Infringements) of DG ENVI
Meeting of 1 February 2007 (oral evidence H11):
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-
Paul BRAITHWAITE, General Secretary of the Equitable Members' Action Group
(petitioner)
Lord NEILL QC and Matthew MORRISON
2.
Witnesses invited to hearings who declined to attend
UK Government and Regulators:
-
The Rt Hon Mr. Des BROWNE former Financial Secretary to the UK Treasury
The Rt Hon Mr. Ed BALLS MP*, current UK Economic Secretary to the UK Treasury
(Treasury: regulator 1998-2001)
Mr. Callum McCARTHY*, Chairman of the Financial Services Authority (FSA) (current
regulator, since December 2001)
Sir Howard DAVIES, ex-FSA Chairman
Mr. Martin ROBERTS, formerly responsible for the Insurance Directorate at the
Department of Trade and Industry, and later at Treasury (DTI: regulator until January
1998)
Other Regulators:
-
Michael MARTIN, Irish Minister for Enterprise, Trade and Employment
European Commission:
-
Frits BOLKESTEIN, Ex-Internal Market Commissioner
Others:
-
John McFall MP*, Chair of the UK House of Commons Treasury Committee
Tony Wright MP, Chair of the UK House of Commons PA committee
Lord Penrose
Ann Abraham*, UK Parliamentary Ombudsman
Iain Ogilvie*, Head of UK Parliamentary Ombudsman Investigations into ELS
Walter Merricks*, Financial Services Ombudsman (FOS)
Stephen Hadrill, Secretary-General of ABI (Association of British Insurers)
Daniel Schanté, director-general CEA (Comité européen des assureurs)
David Forfar, former actuary and Head of Finance of a Scottish Life Assurer
Liz Dolan, journalist at the Sunday Telegraph
Rupert Jones, journalist at The Guardian
Roy Ranson and Chris Headdon, Previous Executives of ELS
Matthias Niesel, former ELAS salesman in NRW
*: Met with EQUI Delegation in London on 16.10.06, see point 8
3. List of accepted written evidence
WE
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Reception of evidence was possible until the closing date of 20 March 2007. Documents
officially considered as written evidence and posted on the website are the following:
92.
91.
90.
89.
88.
87.
86.
85.
84.
83.
82.
81.
80.
79.
78.
77.
76.
75.
74.
73.
72.
71.
70.
69.
68.
67.
66.
65.
64.
63.
62.
61.
60.
59.
58.
57.
56.
55.
54.
53.
52.
51.
50.
49.
Postscript to EMAG presentation on 1 February
Response by EMAG to FOS submissions
Letter from Chair to the FOS and reply from FOS
Letter by EU Ombudsman to Chair
Letter by Young to Chair
Response by FOS to Neill report
Executive Summary Lord Neill's report
Markus Weyer report
Josh Holmes Opinion on Life Directives
Lord Neill report
Submission to EU Ombudsman by Mr Rankin
Letter by Mr Deppe to Chair
Response by ISFRA
Paper on asset shortfall by Investors' Association
Response H. Davies
Response PASC
Senior Counsel's opinion of 27.07.06, Anthony Boswood QC
Official notes of EMAG's meeting with the FSA on 14.12.05
Exchange of letters between EMAG and McGuinness
Presentation by Commissioner McCreevy on 23.11.06
Presentation by Simon Bain on 23.11.06
Letter Hebert Smith to ELS
Presentation by Mr Thomson on 23.11.06
Further paper on fraud by Investors Association
Letter by Chair to Ms Meade and response on 07.11.06
Compromise scheme assessment by FSA
Compromise scheme letter by FSA
Letter by Ms O'Dea to Chair
Letter by Irish permanent representative to the EU
Irish cases submitted to Ombudsman
Submission by Mr Meade to Dublin delegation
Submission by Ms O'Dea to Dublin delegation
Treasury Committee: Report by the Committee on European financial services
regulation
Evidence to Treasury Committee on Actuarial profession
Memo by Cazalet Financial Consulting
Submission by Mr McFall to London delegation
Submission by Mr Merricks to London delegation
Sienna protocol
Annex II to evidence by Mr Seymour on 041006, 'La vie d'or' case
Annex I to evidence by Mr Seymour on 041006
Evidence by Mr Seymour on 041006
Evidence by Ms Kwantes on 041006
The Corley report
Oral evidence by Mr Schneiter on 1309096
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48.
47.
46.
45.
44.
43.
42.
41.
40.
39.
38.
37.
36.
35.
34.
33.
32.
31.
30.
Correspondence between German policyholders and FSA
Response by Mr Thomson, ELS CEO
Evidence by Mr Stonebanks
Response by Chris Headdon to invitation to be a witness
EMAG presentation to Petitions Committee, 13.09.05
Letter from Mr Vinall to Chair on FSA
Letter fraud Josephs McGuinness
Paper by EC on Home/Host issues
2nd submission by Mr Brian Chase Grey
Letter European Commission 6.6.6
Statement of Consumer Director Ireland, 210606
Evidence by FSA on 21.06.06
Evidence by Mr Seymour
Letter Byrne to McGuinness
Burgess Hodgson for meeting 21.06.06
Paper by Michael Nassim, update: "Anatomy of a fraud"
UK government submission for meeting of 21.06.2006
Paper on fraud by the Investors Association
Documents from the Treasury Committee of the UK House of Lords:
(10th Report, 2001-02, Equitable Life and the Life Assurance Industry: An Interim Report
(March 2001); 6th Special Report, Session 2001-02: Government response to the above
(October 2001); Text of the Financial Secretary's (FST) statement to the House on 8
March 2004, and subsequent questioning; Evidence from Lord Penrose and the FST on
16 March 2004; "Restoring Confidence in long-term savings" (8th Report, session 200304, July 2004))
29. Paper on current state of the With-Profits Fund of the ELS
28. Options paper for EMAG
27. Memorandum from FOS to EQUI
26. Burgess Hodgson report for EMAG
25. Letter from Mr Chase Grey to John McFall MEP
24. Presentation by McElwee on 29.05.2006
23. Presentation by ELTA on 29.05.2006
22. Presentation by DAGEV on 29.05.2006
21. Evidence by BAFin - also summary of BaFin evidence
20. Wilde Sapte study implementation report, UK
19. Letter from the European Commission 02.05.2006
18. Written evidence by Mr Brian Edmonds
17. The Baird Report
16. The Penrose Report
15. Petition 0611/2004 and annex to petition 0611/2004
14. Petition 0029/2005 and annex to petition 0029/2005
13. Notice to Members on petitions 0611/2004 and 0029/2005
12. Memorandum to the EP from the UK Ombudsman
11. Memorandum of understanding between the FSA and the FOS
10. Written evidence by Mr Peter Schäfer
9. Written evidence by Mr Brian Chase Grey
8. Paper by Michael Nassim: "An equitable assessment of rights and wrongs"
7. Paper by Michael Nassim: "Equitable Life: Penrose and Beyond - Anatomy of a fraud"
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6.
5.
4.
3.
2.
1.
Presentation by Paul Weir of ELCAG on 25.04.2006
Presentation by Charles Thomson on 25.04.2006
Investor's Association contribution on 25.04.2006
Mr O'Brion on the Irish policyholders receiving compensation in the UK
EMAG contribution on 23.03.2006
European Commission contribution on 23.03.2006
WE-File
List of filed written evidence, not posted on the website, WE-File #:
1. Evidence by Edmonds (letter)
2. Evidence by Power (letter)
3. Evidence by O'Brien (letter)
4. Evidence by Troy (letter)
5. Evidence by Douglas (letter)
6. Evidence by Byrne (letter)
7. Evidence by B.Groves (letter)
8. Evidence by McGuirk (letter)
9. Evidence by O'Farrell (letter)
10. Evidence by Seymour (email) [subsequently put on web as WE 36]
11. Evidence by Ms K. Noonan (letter)
12. Evidence by Peter Thornton (letter)
13. Evidence by Jim Berry (letter)
14. Evidence by Jack Duggan (letter)
15. Evidence by John Galvin (letter)
16. Evidence by Patrick McCarthy (letter)
17. Evidence by Roy Harding (email)
18. Evidence by DAGEV (copies of correspondence with FSA; later WE 48)
19. Evidence by Mr. O'Farrell (letter and news article,+ letters Abraham)
20. Evidence by Mr. N.F.Norrish (letter forwarded by Chichester MEP)
21. Evidence by Mr. Krege (petition 508/2006)
22. Evidence by S&P (ELAS credit ratings 1993-2002)
23. Evidence by John Rankin (on complaint to Ombudsman)
24. Evidence on Lloyds, Poole case (1)
25. Evidence on Lloyds, Poole case (2)
26. Evidence by Mr. Golding on Sun Life
27. Evidence by Mr. Deppe on FOS
28. Evidence by Manfred Westphal (FIN-USE) on follow-up questions
29. FSA information to policyholders July 2004
30. High Court Judgement PO/Pensioners case
31. Evidence by Alexander Kern on follow-up questions
32. Ruling by Institute of Actuaries against Ranson, Headdon
33. Responses by 30 Irish policyholders to questionnaire, including annexes (paper copy only)
WE-Conf
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There are 32 pieces of confidential written evidence, WE-CONF 1-32.
Other background documents:
-
Directives: First Council Directive 79/267/EEC of 5 March 1979 on the coordination of
laws, regulations and administrative provisions relating to the taking-up and pursuit of the
business of direct life assurance; Second Council Directive 90/619/EEC of 8 November
1990 on the coordination of laws, regulations and administrative provisions relating to
direct life assurance, laying down provisions to facilitate the effective exercise of freedom
to provide services and amending Directive 79/267/EEC; Third Council Directive
92/96/EEC of 10 November 1992 on the coordination of laws, regulations and
administrative provisions relating to direct life assurance and amending Directives
79/267/EEC and 90/619/EEC (Third life assurance Directive); Directive 2002/83/EC of
the European Parliament and of the Council of 5 November 2002 concerning life
assurance.
-
List of files from the European Parliament Petitions Committee on the Equitable Life
affair:
1.) Petition 0611/2004 (Arthur White)
-
Petition with annexes
Summary of petition and recommendations from the PETI secretariat (SIR document)
Commission's response to PETI's request for information (CM)
Speech given by Mr Nicolas Jerome Bellord on behalf of the petitioner at the PETI
meeting of 13 September 2005
Various letters from the chairman of PETI to the petitioner informing him about the
progress made in the treatment of his petition
2.) Petition 0029/2005 (EMAG)
-
Petition with annexes
Petition translated into German
Summary of petition by the petitioner
Summary of petition and recommendations from the PETI secretariat (SIR document)
Addendum to petition dated 15 July 2005 concerning remedies
Addendum to petition dated 9 November 2005 concerning FSA and FOS
Commission's response to PETI's request for information (CM) same as above
Speech given by EMAG representatives at the PETI meeting of 13 September 2005 and
PowerPoint slides
EMAG response of 22 June 2005 to Commission statement
Various letters from the chairman of PETI to the petitioner informing him about the
progress made in the treatment of his petition
e-mail exchanges between PETI secretariat and petitioners
3.) Petition 0775/2005 (Manfred Bischof)
-
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Petition
Summary of petition and recommendations from the PETI secretariat (SIR document)
Various letters from the chairman of PETI to the petitioner informing him about the
progress made in the treatment of his petition
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4.) Petition 0067/2006 (Franz-Josef Groemping)
-
Petition
Letter to the petitioner acknowledging receipt of his petition.
5.) Request to set up a Committee of Inquiry
-
Background note of PETI secretariat on possible request to set up a Committee of Inquiry
Various draft versions of mandate
Letter of PETI chairman to President Borrell requesting the setting-up of a Committee of
Inquiry (29. September 2005)
Reply of President Borrell to the PETI chairman (13 October 2005)
List of signatures by members supporting the request to set up a Committee of Inquiry
Opinion of the Legal Service concerning the request (in FR only)
Conference of Presidents: summary of decisions at meetings of 19 December 2005 and 12
January 2006
EP decision of 18 January on setting up a Committee of Inquiry into the collapse of the
ELAS
6.) Documents relating to investigations in the UK
-
Report of the FSA on the review of the Regulation of the ELAS from 1 January 1999 to 8
December 2000 ("Baird Report")
Treasury Committee Report: Equitable Life and the Life Assurance Industry: An Interim
Report Volume I: Report and Proceedings of the Committee (27 March 2001)
Treasury Committee Report: Equitable Life and the Life Assurance Industry: An Interim
Report Volume II: Minutes of Evidence and Appendices (27 March 2001)
Treasury Committee: Regulation of Equitable Life; Minutes of Evidence (30 October
2001)
Treasury Committee: Regulation of Equitable Life; Minutes of Evidence (13 November
2001)
Treasury Committee: Restoring confidence in long-term savings: The Equitable Life
Inquiry; Oral Evidence (16 March 2004)
Report of the Equitable Life Inquiry ("Penrose Report")
The UK Parliamentary Ombudsman: The prudential regulation of Equitable Life (1st
report)
Memorandum to the Petitions Committee of the EP by the Office of the UK Parliamentary
Ombudsman concerning the investigation into the prudential regulation of Equitable Life
7.) Other documents
-
Submission by ELAS to PETI concerning possible claims by society and policyholders
against regulators
Various press articles
4. Information exchanges with the European Commission
Information was requested from the European Commission regarding the transposition and
implementation of the 3LD in the UK and other Member States. This includes the so-called
implementation reports as well as the reviews of those implementation reports. In addition,
the European Commission was asked to provide EQUI with a complete list of all documents
related to the ELS affair in its possession as well as a list of the infringement procedures that
had been opened with Member States other than the UK with regards to the 3LD. The
Commission responded by sending the private study commissioned into the implementation
of the 3LD, the Wilde Sapte study, as well as nine individual country correlation reports. It
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also sent a list of relevant infringement proceedings and further information on the review of
the study and relevant correspondence.
5. Meeting with members of staff of the UK Parliamentary Ombudsman on 29 March 2006
in London
On 29 March 2006, the rapporteur met with members of staff of the UK Parliamentary
Ombudsman, who is currently conducting an inquiry into alleged maladministration by UK
authorities in the regulation of Equitable Life. The main purpose of the meeting was to
discuss, among other issues, the scope and timing of the respective inquiries and the
cooperation between the Committee of Inquiry and the Ombudsman.
On this occasion, the rapporteur pointed out that it would be desirable for the Committee of
Inquiry to know the Ombudsman's findings before the committee finalises its work. The
Ombudsman's staff confirmed that the final report would be published before the end of 2006,
and that a draft report was expected to be ready by July 2006 and would be sent to both a
representative of the complainants and the UK Government for comment. However,
subsequent events led the Ombudsman to postpone publication of the report until mid-2007.
At the time of publication of this report, the timing remains uncertain.
The rapporteur discussed possible ways of organising cooperation between the UK
Ombudsman and the committee prior to the publication of the Ombudsman's report. The
question was raised as to whether and what kind of information the Ombudsman would be
willing to share. For instance, the Ombudsman has already carried out a detailed analysis of
the UK regulatory system on life assurance, something which the Committee of Inquiry is
also required to do under its mandate. However, the Ombudsman's staff underlined the fact
that the Ombudsman is not empowered to disclose any information obtained in the course of
her investigation other than through her final report.
6. Tools for Members
A glossary of specialized insurance and ELS-related terms and a timeline of events was
produced for the benefit of the committee's Members (see Annex), as well as a background
note on the regulatory structure of the UK and a note on the scope and powers of a
European Parliament Committee of Inquiry.
Website: A website for the EQUI committee was set up and has been operational since 16
February 2006. Here citizens and Members alike can find all relevant information as well as a
number of contact lists, such as the committee secretariat, political group' advisers and other
useful information. E-mails were regularly sent to Members with the updates to the website.
The Brussels-based press has also been informed of its existence. The purpose of the website
was to allow the work of the committee be as transparent as possible for the public, without
prejudice to the need to preserve confidentiality when required. The EQUI secretariat kept the
website updated to ensure that all relevant documents (oral and written evidence, background
documents and agendas) and Working Documents, Draft Reports and other documents were
available. Up to 92 pieces of evidence were posted on the website before the closing date of
20 March 2007. Members were also able to contribute to the web by proposing that
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documents or links be added at their request. The verbatim transcripts of each of the 11
committee public hearings were also posted on the website. The link to website is as follows:
(http://www.europarl.europa.eu/comparl/tempcom/equi/default_en.htm)
7.
Studies:
-
Study on part 1 of mandate (ES 1): In order to help with the tasks at hand, EQUI
requested the advice of external experts. For this purpose, a comparative study was
commissioned under the committee's expertise budget. The experts were asked to examine
how the provisions on prudential supervision and conduct of business rules of life
assurance undertakings as laid down in the relevant EU Directives were transposed into
UK law. The study identifies for each of those provisions the matching UK provisions and
indicates when they entered into force, by way of a transposition table. The transposition
in the UK was then compared with implementing legislation in Ireland, Germany and
Spain. The results of the study are included in the findings of the final report.
-
Study on part 2 of mandate (ES 2): To advise members on legal and procedural issues
related to this part of the mandate, as well as to collect and analyze relevant background
material, the Committee of Inquiry commissioned an external study on the UK regulatory
arrangements related to both prudential supervision and conduct of business rules of life
assurance undertakings, seen in the context of the Equitable Life case. The comparative
approach includes financial regulators in Ireland, Germany and Spain and other relevant
examples of transposition and regulation in EU Member States. The results of the study
are included in the findings of the final report.
-
Study on part 3 of the mandate (ES 3): the committee received a comparative study on the
adequacy of remedies available under UK and EU law for policyholders from the UK and
other Member States in the context of the Equitable Life affair. The study provides a
complete list of existing judicial and non-judicial remedy schemes available under UK
and EU law and gives a qualitative judgment of their adequacy. The results of the study
are included in the findings of the final report.
8. Delegation visits to Dublin and London
The committee made two fact-finding visits - to Dublin on 6 October 2006 and to London on
16 October 2006 - as part of the evidence-gathering process in preparation for its report.
In Dublin, MEPs met Irish Equitable Life policyholders and financial services regulators as
well as the Irish Financial Services Ombudsman and the former Insurance Ombudsman of
Ireland. In London, they met British policyholders, Ed Balls, Economic Secretary to the
Treasury, the FSA chairman Callum McCarthy, the FOS, Mr Merricks, the Parliamentary
Ombudsman, Ms Abraham, and others. Press conferences were held during both visits.
9.
Workshops
Two workshops were organized in the context of the investigation:
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WS 1: Presentation of studies, 5 October 2006, 9:00-12:30

Study on transposition of EU life insurance directives, presentation by the authors (Taki
Tridimas, professor, Sir John Lubbock Chair for Banking Law, Centre for Commercial
Law Studies, Queen Mary University of London)

Study on regulatory systems, presentation by the authors (Jane Welch, Director, European
Financial and Corporate Law Centre, British Institute of International and Comparative
Law)

Study on redress mechanisms, presentation by the authors (Taki Tridimas, professor, Sir
John Lubbock Chair for Banking law, Centre for Commercial Law Studies, Queen Mary
University of London)
WS 2: Transposition issues, 30 November 2006, 14.30-17.30

Session 1: General Issues concerning the transposition of EU law into National law
(Professor Stefan Vogenauer; Professor Bernard Steunenberg)

Session 2: Transposition of Financial Services Directives into National Law (Dr Manfred
Westphal. Fin-Use; Dr Kern Alexander; Ms Lieve Lowet)
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PART II - TRANSPOSITION
on the alleged contraventions or maladministration in the application of
Directive 92/96/EEC (the "Third Life Directive") by the UK and on its
monitoring by the European Commission
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INDEX PART II
I.
Introduction
I.1. The mandate
I.2. The scope
I.3. The directive in brief
I.4. Specific actions
II.
Investigation into the correct transposition into UK law of the 3LD and its
application/implementation by UK authorities in relation to the ELAS
II.1. Analysis of transposition in detail in light of the evidence
II.1.1. Key articles of the 3LD: 8, 10, 18, 25, 28, 31
II.1.2. Other articles of the 3LD
II.1.3. Relevant articles from other Directives
II.2. Further evidence on transposition
II.2.1. Evidence by the Commission
II.2.2. Evidence from the implementation study
II.2.3. Other selected written and oral evidence on transposition
Conclusions
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I.
Introduction
I.1.
The mandate
This part of the report (Part II) aims to provide the Committee of Inquiry into the Crisis of the
Equitable Life Assurance Society (EQUI) with information on whether Directive 92/96/EEC1
(the Third Life Directive or 3LD) was correctly transposed and properly implemented at the
national level in the UK by its competent authorities. The mandate further specifies this
section by reproducing Recital 7 of the 3LD relating to "the monitoring of the financial health
of insurance undertakings, including their state of solvency, the establishment of adequate
technical provisions and the covering of those provisions by matching assets". This analysis
of the transposition and implementation of the Directives must be undertaken with regards to
the specific circumstances surrounding the Equitable Life Assurance Society (ELAS) as well
as from the viewpoint of the whole life insurance sector, particularly with regard to its
regulatory regime.
Consequently, the committee needs to identify first of all those provisions of UK national law
intended to give effect to the requirements of the Directives, and examine whether these
requirements were transposed in a full and timely manner. Secondly, the committee will need
to examine if the application by the various UK authorities of those national legal provisions
which transposed the Directive has been in conformity not only with UK but also with EU
law. For this purpose, it will have to clarify the respective responsibilities of the various
financial authorities involved in the supervision of Equitable Life during the reference period.
Detailed investigations need to be carried out to establish by whom, when and how Equitable
Life's solvency, its accounting and provisioning practices, were supervised and how the
authorities responded to possible weaknesses.
This part (Point II.2.1) will also examine in detail how the Commission has monitored the
implementation of the 3LD. This section of this part is closely linked to Part V of this report
on systematic weaknesses in the Commission.
I.2.
The scope (directive and time)
The directive
The mandate limits EQUI's scope to the 3LD, adopted in 1992, and the directive that codified
1
Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and administrative provisions
relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (third life assurance Directive), OJ L
311 , 14/11/1997, p.34.
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it (hereafter, the “codified directive”1 or CD), adopted in 2002. However, it should be pointed
out that the earlier directives, which were amended by the 3LD and then subsequently
codified by the CD, also need to be examined, i.e. the first2 (1LD) and second3 (2LD) life
assurance directives, from 1979 and 1990 respectively.
The fact that the 3LD is not the only legal text to be taken into account is crucial. The 3LD
complements and reinforces key provisions that were already contained in 1LD and 2LD.
Moreover, any other community legislation applicable to the case examined by the EQUI
committee will likewise warrant scrutiny. This is particularly true of Directive 2002/12/EC4,
also known as Solvency I, but also of others, which will be listed further on.
For the purposes of this inquiry, all allusions to articles will refer to the 3LD and in some
instances, if necessary, the equivalent articles from other directives or from the CD will be
mentioned in brackets. If major differences exist between provisions contained in different
directives, they will be specified. For the purpose of identifying articles, it is useful to peruse
the Table of correspondence in Annex VI of the CD.
The main provisions relevant to the inquiry are to be found in Title III of the 3LD, namely
Articles 8-31.
Time period
As far as the period covered by the inquiry is concerned, the mandate specifies that it should
commence with the entry into force of the 3LD (1 July 1994) and should end when the main
events surrounding the ELAS case occurred, i.e., 1999-2001. Nevertheless, for the purposes
of the inquiry, and as has been explained previously, it is necessary to analyze events before
1994, both in terms of the time periods when the 1LD and 2LD were in force and with regards
to the whole process of adoption of the 3LD before 1994. Moreover, the mandate also
mentions the year 1989 as the starting point for the investigation as far as allegations against
UK regulators are concerned. Therefore, in broad terms, the reference period covers 19892001.
I.3.
The directives in brief
The importance of the 3LD for this inquiry is paramount. This is clearly illustrated by the
mandate itself when it quotes Recital 7 of the Directive, which speaks of "the monitoring of
1
Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance (OJ L
345, 19.12.2002, p 1). Directive as last amended by Directive 2005/68/EC (OJ L 323, 9.12.2005, p. 1).
2 First Council Directive 79/267/EEC of 5 March 1979 on the coordination of laws, regulations and administrative provisions
relating to the taking up and pursuit of the business of direct life assurance, OJ L 063 , 13/03/1979 P. 0001 - 0018; Second
Council Directive 90/619/EEC of 8 November 1990 on the coordination of laws, regulations and administrative provisions
relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide services and
amending Directive 79/267/EEC, OJ L 330 , 29/11/1990 p.50.
3 Second Council Directive 90/619/EEC of 8 November 1990 on the coordination of laws, regulations and administrative
provisions relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide
services and amending Directive 79/267/EEC, OJ L 330 , 29/11/1990 p.50.
4 Directive 2002/12/EC of the European Parliament and of the Council of 5 March 2002 amending Council Directive
79/267/EEC as regards the solvency margin requirements for life assurance undertakings.
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the financial health of insurance undertakings, including their state of solvency, the
establishment of adequate technical provisions and the covering of those provisions by
matching assets". Hence, these are the key elements that should form the core of the
investigation into the issues of correct transposition and supervision.
The 3LD, later complemented and built upon by the 2002 CD, is the basic text governing the
single market in life insurance in the EU. The text’s basic tenets are the principles of single
authorisation and mutual recognition. The Directive incorporated the main provisions
contained in the 1979 1LD (authorisation of life assurance undertakings by a competent
authority, constitution of adequate sufficient technical provisions and of a solvency margin)
and the 1990 2LD, which allowed life assurance providers to benefit from the freedom to
provide services across borders for the first time.
The overall approach pervading the 3LD consisted in bringing about a certain degree of
harmonisation, which was considered at the time an essential stepping stone to achieving
mutual recognition of authorisations and prudential control systems. The Directive thus made
it possible to grant a single authorisation valid throughout the Community and enshrined the
principle of supervision by the home Member State. The aim was to promote economic
efficiency and market integration by permitting insurers to operate throughout the EU via the
opening of offices or via the cross-frontier provision of services. This would give consumers a
wider choice of insurer and insurance products, providing them at the same time with the
knowledge that all insurers would be subject to comparable minimum standards. The
investigation into allegations regarding transposition and implementation must assess whether
both the letter and the spirit of the Directive were upheld both by transposed UK law and UK
regulatory practice.
With respect to the principle and methods of financial supervision, the Directive significantly
modifies the scope of competence of the supervisory authorities of the home and host
Member States. It basically provides that the home Member State’s authorities are responsible
for the supervision of the “entire business” of the assurance undertakings whose head office is
established in their territory and, accordingly, it curtails the supervisory power of the host
Member State’s authorities over EC companies operating within their territory.
In order to facilitate the exchange of information necessary for the supervision of
undertakings operating in more than one Member State, the Directive introduces various
exceptions to the auditor’s duty of secrecy, authorises the exchange of information between
competent authorities and imposes on auditors the duty to report facts and decisions that may
affect the functioning of the undertaking.
A number of provisions are devoted to providing the necessary harmonisation of the financial
guarantees of assurance undertakings. Detailed guidelines and principles are given on
technical reserves, the covering assets and the methods for their calculation, determination of
investment categories and valuation, matching rules and asset localisation rules. In turn, other
articles provide for the coordination of rules relating to solvency margins, the items they may
include and the minimum solvency margin that must be implemented for each type of
assurance underwritten.
The Directive also includes provisions aimed at the further harmonisation of conduct of
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business rules, including those governing the information to be provided to policyholders and
the minimum cancellation period to which policyholders must be entitled.
The 2002 consolidated Directive (CD)
The aim of the 2002 recast Directive was to consolidate Community provisions on life
assurance so as to provide the public with a single, clear and readily understandable text. The
majority of the directive's provisions are a restatement of those contained in the 1LD, 2LD
and 3LD. The only new provisions relate to: the definition of a regulated market, dates
concerning the activities of composite undertakings, calculation of future profits, presentation
of a scheme of operations by third country branches to be established in the EU, abolition of
derogations, and rights acquired by existing branches.
Other recent legislation

Directive 95/26/EC reinforcing prudential supervision. This Directive modified several
financial services directives, and amongst them the 3LD, with the objective of
strengthening the powers of the supervisory authorities to prevent fraud when a financial
undertaking forms part of a group. Specifically, this Directive regulates disclosure of
group information to competent authorities and defines and clarifies concepts such as
"close links". The Directive also requires that an auditor report promptly to the authorities
whenever he becomes aware of certain facts which are liable to have a serious effect on
the financial situation or the administrative and accounting organization of a financial
undertaking.

Directive 2002/12/EC. Also known as Solvency I, it is aimed at strengthening life
assurances’ solvency requirements in order to ensure adequate capital requirements. To
this end, the previous solvency margin regime from the 1970s is changed: a limit is set on
the possibility of including future profits in the available solvency margin and an
obligation to phase them out by 2009 is introduced. Secondly, the existing minimum
guarantee fund is increased and is periodically adjusted according to inflation. Finally,
early intervention by the regulator to take remedial action is strengthened, when the
undertaking’s position is deteriorating and policyholders’ interests are threatened.

Directive 2002/87/EC on the supplementary supervision of credit institutions, insurance
undertakings and investment firms in a financial conglomerate. This Directive constitutes
the first initiative in moving away from a sector-specific regulatory approach in order to
tackle the challenges raised by financial conglomerates, for example, by requiring the
establishment of proper lines of communication between supervisory authorities
responsible for different financial industries.

Directive 2005/1/EC on a new organisational structure for financial services committee
(the so-called 'Lamfalussy committees'). Amongst other things, this law sets up CEIOPS,
the European Committee of Insurance and Pensions Supervisors. The 'Lamfalussy process'
consists of four levels:
-
Level 1: The EP and Council adopt legislation in co-decision, determining
framework principles and guidelines on implementing powers
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-
-
Level 2: Technical implementing measures taking the form of further directives
and/or regulations, adopted under powers delegated at level one
Level 3: Networking between regulators with a view to producing joint
interpretative recommendations, consistent guidelines and common standards, peer
review, and comparisons between regulatory practice to ensure consistent
implementation and application
Level 4: Monitoring by the European Commission of Member State compliance
with EU legislation and enforcement action where necessary.

Directive 2005/68/EC on reinsurance activities. As reinsurance activities conducted by
specialised reinsurance undertakings were not subject to EU law at the time, a specialized
directive was adopted, to establish a legal framework for this activity and address the
weaknesses in existing provisions, which had resulted in significant differences in the
level of supervision of reinsurance undertakings in the EU, in turn creating barriers to the
pursuit of reinsurance business.

The future Solvency II Directive, a second reform of the solvency margins of insurance
companies. This project has been in the pipeline for several years and is expected to be
presented by the Commission in July 2007. The main elements of the proposal are to
harmonise capital adequacy standards and develop more risk-based rules, in an effort to
match solvency requirements more closely to the true risk encountered by an insurance
undertaking, as well as enhancing the powers of intervention of insurance regulators.
I.4.
-
-
Specific actions foreseen/undertaken in the context of Part II
Hearing of petitioners before the committee (see relevant list);
Request for information from the Commission regarding:
o the transposition of the relevant Directives and their application by competent
authorities during the reference period;
o action taken by the Commission with regard to monitoring implementation;
Background analysis of EU legislative and regulatory framework in relation to Equitable
Life;
Clarification of the UK authorities' respective competences with regard to the supervision
of Equitable Life;
Hearing of UK Government and regulators: HMT (Her Majesty's Treasury), FSA
(Financial Services Authority) and GAD (Government Actuary Department);
Fact-finding missions to the UK and Ireland and hearing of competent authorities in order
to establish whether the relevant provisions were properly applied;
Comparative analysis of transposition in the UK and other Member States: a comparative
study was commissioned under the committee's expertise budget, with experts being asked
to examine how the provisions on prudential supervision and conduct of business rules of
life assurance undertakings as laid down in the relevant EU Directives were transposed
into UK law. The study identified for each of those provisions the matching UK
provisions and indicated, by way of a transposition table, when they entered into force.
The transposition in the UK was then compared to implementing legislation in Ireland,
Germany and Spain. The contents of the study served as input for this working document.
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II.
Investigation into the correct transposition into UK law of the 3LD and its
application/implementation by UK authorities in relation to the ELAS
Introduction
The first task is to identify clearly those provisions of UK national law intended to give effect
to the requirements of the Directive and to evaluate whether they are of the same quality and
require the same standards, both in terms of the letter and the ultimate aim of the directive.
The fact that the UK implemented the directive in a fragmented way (i.e., the directive was
transposed not into one single national law but spread throughout different acts of varying
hierarchy) is not helpful from the outset. Determining whether this means of transposition
gave rise to difficulties which thwarted effective regulation is one of the objectives of this
investigation.
A second objective would be to ascertain whether the responsible regulators indeed fulfilled
the requirements of national law and, consequently, of the EU Directive. It might be that the
Directive was defectively transposed and that the regulators faithfully applied defective and
insufficient national law; on the other hand, it could also be that the directive was faithfully
and fully transposed but the regulators did not completely fulfil their responsibilities and did
not uphold both the letter and the spirit of both UK and EU law. Conversely, both these
scenarios could be wrong, i.e. not only was the EU Directive correctly transposed but the
regulators also acted adequately. Finally, there could be a mixed picture (incorrect
transposition compounded by incorrect application). The outcome of these investigations will
be clearly laid out in the conclusions of this part of the report. Moreover, these conclusions
feed into the contents of Part V on systematic weaknesses in the Commission and how they
have contributed to the ELAS crisis. In this part, the concept of implementation used as
reference throughout the report of the Committee of Inquiry will be also developed.
The methodology followed is: first, to identify one by one the key provisions of the 3LD
relevant to the ELAS case, particularly as regards the monitoring of financial health, state of
solvency and the establishment of adequate technical provisions; second, to identify and
analyze the matching implementing provisions in UK law to ascertain if they fulfil the quality
requirements of the directive; third, to evaluate the performance of the regulator taking into
account the thresholds, benchmarks and requirements that have been set in those matching
implementing provisions as well as in the Directive.
To this end, the main sources of evidence, other than the directive itself and the UK
provisions, will be the information received from the European Commission, the
implementation study undertaken by the Wilde Sapte firm, the oral evidence obtained during
the EQUI hearings and any other written evidence contained in the list of official written
evidence.
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II.1.
Analysis of transposition in detail in light of the evidence
In order to understand the 3LD, it is pertinent to outline its structure, which falls into four
parts:
1. Definition and scope;
2. The taking up of the business of life assurance;
3. Conditions governing the business of life assurance, which include: principles and
methods of financial supervision, rules relating to technical provisions, to the solvency
margin and to the guarantee fund, rules relating to contract law and conditions of
assurance;
4. Provisions relating to the right of establishment and freedom to provide services.
The following 16 articles (and 1 annex) of the 3LD have been selected on account of their
relevance to this inquiry:





Articles 8, 9, 10, 12, 13 and 15: financial supervision;
Articles 18, 19, 20, 21 and 22: technical provisions;
Article 25: solvency margin;
Articles 28, 29, 30 and 31: conduct of business rules;
Annex II: information for policyholders.
The key articles for the investigation (8, 10, 18, 21, 25, 28 and 31) are dealt with first.
As far as UK law is concerned, the UK notified the Commission of its implementation of the
3LD by letter dated 29 June 1994. The UK letter specified that the following relevant
statutory instruments giving effect to the Directive would enter into force on 1 July 1994, the
deadline laid down in the Directive:
1. The Insurance Companies (Third Insurance Directives) Regulations 1994, which amended
relevant sections of the Insurance Companies Act (ICA) 1982 and the Financial Services
Act 1986 with a view to introducing the principle of home country control for direct
insurance as provided by the 3LD and the Non-Life Directives;
2. The Insurance Companies Regulations 1994, which implemented the 3LD’s rules on
technical provisions, matching and localisation of assets, solvency margin and guarantee
funds;
3. The Insurance Companies (Accounts and Statements) (Amendment) Regulations 1994,
which implemented the 3LD's rules relating to the form and contents of the annual returns,
amending the Insurance Companies (Accounts and Statements) Regulations 1983.
According to official records, the UK respected the deadline for entry into force and correctly
notified the Commission, providing copies of the implementing legislation.
As can be seen from the above, and in contrast to the consolidated approach followed by other
Member States, the UK opted for a piecemeal and indirect transposition, transposing the
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Directive by adopting various statutory instruments, which introduced amendments to a
number of Acts of Parliament and subordinate legislation. This technique is often used in the
UK. In addition, and contrary to best transposition practice1, the UK implementing measures
did not identify which provisions of the Directive were being transposed on an article by
article basis. Each implementing measure included a reference to the Directive in the
explanatory notes but did not include a table showing the correlation between provisions from
national implementing measures and provisions from the Directive.
Moreover, the structure and terminology2 used by UK implementing legislation does not
always and necessarily coincide with that of the Directive.
It can be argued that this indirect transposition lacks clarity and may not be the best way of
incorporating EU standards into domestic legislation. However, this lack of clarity does not
necessarily equate with failure to meet the requirements of the 3LD3.
Methodology
Each of the key articles will be analyzed in light of the evidence received and in an analogous
fashion, using the following format:





Number and title of the article
Summary of objectives
Text of the article
Detailed comments on UK transposition
Link to the ELAS case
Equivalent articles in the 1LD, 2LD and CD, where they exist, are referred to after each
individual article.
1
See Recommendation from the Commission of 12 July 2004 on the transposition into national law of Directives affecting
the internal market [Official Journal L 98 of 16.04.05].
2 For instance, UK legislation uses the terms ‘long-term business’ and ‘general business’ instead of the Directive’s ‘Life
insurance’ and ‘Non-Life insurance’.
3 It would be a breach of Community law only if it ran counter to legal certainty or left individuals and economic actors in a
state of uncertainty as to their rights and obligations emanating from the Directive. The case law of the ECJ lays down a
number of specific requirements: (a) it is essential for national law to guarantee that the national authorities will effectively
apply the Directive in full; (b) the legal position under national law should be sufficiently precise and clear; and (c)
individuals must be made fully aware of all their rights and, where appropriate, be able to rely on them before the national
courts.
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II.1.1. Key articles of the 3LD: Articles 8, 10, 18, 21, 25, 28 and 31
Article 8 - Competent authorities and supervision (Articles 15 of 1LD and 10 of CD)
Summary of objectives
Article 8 clearly states that financial supervision of an insurance company shall be the sole
responsibility of the home Member State. It also adds that the host authorities shall inform the
home authorities if they believe the company's activities are affecting its financial situation.
Financial supervision includes verification of solvency and the establishment of technical
provisions and of the assets covering them. Likewise, the home Member State requires every
company to have sound administrative and accounting procedures and adequate internal
control mechanisms.
Text of the article
Article 8
Article 15 of Directive 79/267/EEC shall be replaced by the following:
'Article 15
1. The financial supervision of an assurance undertaking, including that of the business it carries on either through branches
or under the freedom to provide services, shall be the sole responsibility of the home Member State. If the competent
authorities of the Member State of the commitment have reason to consider that the activities of an assurance undertaking
might affect its financial soundness, they shall inform the competent authorities of the undertaking's home Member State. The
latter authorities shall determine whether the undertaking is complying with the prudential principles laid down in this
Directive.
2. That financial supervision shall include verification, with respect to the assurance undertaking's entire business, of its
state of solvency, the establishment of technical provisions, including mathematical provisions, and of the assets covering
them, in accordance with the rules laid down or practices followed in the home Member State pursuant to the provisions
adopted at Community level.
3. The competent authorities of the home Member State shall require every assurance undertaking to have sound
administrative and accounting procedures and adequate internal control mechanisms.'
Comments on UK provisions1
In order to adjust it to the principle of home country control the scope of application of
Part II of the ICA 1982 was amended. The core domestic rules that transposed Article 8 of the
3LD into UK legislation are included in the Insurance Companies (Third Insurance
Directives) Regulations 1994 and the Insurance Companies (Amendment) Regulations 1994.
The provisions that limit the UK Secretary of State’s supervisory power over EC companies
with their head office in a Member State other than the UK who carry on activities in the UK
either via the establishment of a branch or through the cross-border provision of services are
found in the Insurance Companies (Third Insurance Directives) Regulations 1994.
Regulation 13 inserted paragraph 1A into section 15 of the ICA 1982, which basically
excludes EC companies from the application of Part II of the Act in so far as those companies
are carrying on insurance business through a branch and have complied with the
requirements specified in Part I of Schedule 2F to the Act. Regulation 45 inserted
Schedule 2F into the ICA 1982.
1
All sections entitled 'Comments on UK provisions' use as their primary source ES 1.
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The Secretary of State has residual power to impose requirements for the protection of
policyholders, which includes the right to take “any action as appears to him to be
appropriate”. In principle, the Secretary of State can only exercise this power over UK or
non-EC companies. However, in certain circumstances it can exercise this power over EC
companies operating on UK territory. The conditions for the exercise of this power over EC
companies are spelled out in paragraph 15 of Schedule 2F to the Act. In line with the
Directive, those conditions establish that the Secretary of State can exercise those powers
over EC companies only if the supervisory authority of the company’s home Member State
has so requested.
Paragraph 16 of Schedule 2F prescribes what the Secretary of State can do when an EC
company fails to comply with any provision of law applicable to its insurance activities in the
UK. According to this paragraph, the first step is to notify the supervisory authority in the
home Member State (16(2)). If the company persists in contravening the provision in question,
paragraph 16(3) allows the Secretary of State, after informing the supervisory authority of the
home Member State, to direct the company to cease carrying on insurance business or
providing insurance. Finally, paragraph 16(4) allows the Secretary of State to direct the
company to cease carrying on insurance business even without informing the supervisory
authority of the home Member State, if he considers such measures should be taken as a
matter of urgency. The Secretary of State must always inform the company in writing of the
reasons for adopting such a measure.
The provisions that expand the Secretary of State’s supervisory power over the entire business
(within the Community) of those companies with a head office in the UK are included in the
Insurance Companies (Amendment) Regulations 1994. Regulation 4 amends section 15 of the
ICA 1982, including “all UK companies which carry on business in a Member State other
than the United Kingdom”. The scope of competence of the UK supervisory authorities over
insurance undertakings whose head office is in the UK is broad enough, in line with the
requirements of the Directive. The Secretary of State has powers to verify the assurance
undertaking’s state of solvency, the establishment of technical provisions and the assets
covering them with respect to the assurance undertaking’s entire business.
The requirement for assurance undertakings to have “sound administrative and accounting
procedures and adequate internal control mechanisms” has been transposed into domestic
legislation by Regulation 5 of the Insurance Companies (Third Insurance Directives)
Regulations 1994, which amends section 5 of the ICA 1982 on the conditions to be met by the
assurance undertaking to obtain an authorisation to operate. Regulation 5 inserts sub section
(1A) into section 5 of the Act, which prevents the Secretary of State from issuing an
authorisation when it appears to him that the applicant does not or will not fulfil the criteria
of “sound and prudent management”. The Regulation also inserts an entire schedule to the
Act which develops the meaning of “sound and prudent management”. The schedule specifies
that for a company to be regarded as conducting its business in a sound and prudent manner
it has to maintain, amongst other things, “adequate accounting and other records of its
business” and “adequate systems of controls of its business and records”. It then goes on to
specify the meaning of these two standards. Paragraph 6A of Schedule 6 to the Insurance
Companies (Accounts and Statements) Regulations 1983, as amended, stipulates that the
certificate by Directors required by Regulation 26(a) must also state, by way of a list, any
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published guidance with which the systems of control established and maintained by the
company in respect of its business comply.
Link to the ELAS case
There are three elements of this article linked to the ELAS case. First, the obligation of
regulators to supervise the company as a whole, i.e., always to take account of its 'entire
business'; secondly, the requirement to have 'sound administrative and accounting procedures
and adequate internal control mechanisms'; thirdly, the obligation of the host authorities to
inform the home authorities when problems arise.
1. Supervision of the 'entire business' and PRE
It is safe to assume that, when the article states in such simple, clear and unambiguous terms
that financial supervision must cover the “assurance undertaking's entire business”, that is
precisely what the legislator intended and nothing else. ‘Entire business’ means, it would
seem, in all languages and circumstances, the totality of a company’s business, without any
exceptions or loopholes.
Having established this, it is pertinent to analyze the numerous pieces of evidence received
which claim that the UK authorities (the home Member State) did not correctly supervise the
company because they did not sufficiently take into account or simply disregarded the idea of
the ‘entire business’. Evidence refuting these claims also needs to be considered.
First of all, Lord Penrose (WE 16)1 claims that the regulator focused exclusively on solvency
margins and took no account of accrued terminal bonuses, which are those non-contractual
benefits distributed by the company at its discretion. These bonuses might be considered,
according to one interpretation, as an integral part of the company's ‘entire business’ (this is
directly linked to the arguments relating to Article 18 on Technical Provisions). The
importance of these bonuses and their link to the GAR issue is explained at length in Part I
(Introduction) and Part III (Regulatory issues).
UK law includes a reference, not mentioned by the Directive, to pay due regard to the
reasonable expectations of policyholders (PRE). The UK regulator claimed that PRE in
respect of terminal bonuses was not created by the society's bonus practice. This is what Lord
Penrose was told (WE 16)2. However, unconvinced by these arguments, he refutes them and
1
"...the forms and statements required in the annual reporting process were not designed at any time to elicit information
relevant to regulatory intervention, except in respect of solvency. In particular, the forms and statements at no time sought to
elicit information necessary to enable regulators to form a view on whether the reasonable expectations of policyholders and
potential policyholders would be likely to be met or frustrated." (par. 210, chapter 19, WE 16)
2
"GAD and the Treasury have told the inquiry that the relevance of terminal bonus was always recognised by GAD and the
regulators but that PRE in respect of terminal bonus was not created by the Society's bonus practice. They point to the notes
which stated that a terminal bonus was not guaranteed. However, GAD and the Treasury also recognise that PRE was not
restricted to guaranteed benefits. It is not necessary to conclude that policyholders would have reasonable expectations of
receiving a precise amount of bonus to take the view that reasonable expectations would still have been created. The point
is highlighted in GAD's own representations: “It was generally accepted in the life insurance market that past levels of
terminal bonus did not create reasonable expectations for the future, as they would be entirely dependent on market
conditions, subject to a degree of smoothing, which varied considerably from company to company.” The reasonable
expectation would not be that the precise policy value quoted would be payable, regardless of market conditions or
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argues that PRE did indeed arise by reason of the Society's terminal bonus practice (in other
words, that policyholders had reasonable expectations that they were entitled or would receive
discretionary bonuses in addition to contractual benefits).
Holmes, in WE 84, supports this thesis: "The protection of PRE under UK law was of great
importance because of the shift in the 1980's and 90's in the balance of benefits provided by
ELAS under its policies away from guaranteed benefits to un-guaranteed terminal (later final)
bonus. [...] Whereas guaranteed benefits qualified as 'liabilities' under national an
Community law1, and therefore had to be reserved for, the only protection accorded to
unallocated terminal or final bonus under the UK regulatory scheme was the obligation to
consider whether to intervene in order to protect the reasonable expectations raised in
relation to such bonus" (See also section II.2. ‘Further evidence on transposition’).
From the different ELAS sales materials analyzed and various pieces of evidence (WE 26
Burgess Hodgson, WE 52-54 Seymour, H5 Lloyd), it is possible to infer that terminal bonuses
were an integral part of the package offered to policyholders, who had thus been led to expect
that these bonuses would be paid depending only on the state of the markets at the time of
leaving the Fund. Indeed, the Society used its terminal bonus practice to indicate policy
values to members, to make payments on maturity or surrender, and to encourage new policy
sales through statements of past performance.
To summarize, some of the evidence received by the committee points to a situation where
the regulator always focused exclusively on solvency margins and took little or no account of
accrued terminal bonuses in its overall analysis of the financial health of the company. One
line of reasoning thus argues that, if it is to be considered that these types of bonuses are an
integral part of the company's ‘entire business', the regulatory authorities should have taken
them into account during the course of their duties, as required by Article 8. The fact that the
UK had the option of not forcing ELAS to reserve for discretionary bonuses did not
necessarily exonerate the authorities from doing their utmost to respect the letter and the
ultimate aim of the directive, which, as has been said, required that financial supervision
cover the “assurance undertaking's entire business”.
2. Sound administrative and accounting procedures and adequate internal control
mechanisms: the Appointed Actuary issue
The 3LD lays down a baseline for regulation and, consistent with the nature of a directive as
opposed to a regulation, leaves it to Member States to find the most appropriate means to
achieve the results required by the Directive’s provisions. One of the means the UK regulators
came up with was the figure of the Appointed Actuary (AA), an essential part of the UK
national insurance framework and one which does not appear in the Directive. One of the
AA’s missions was to act partly as a guardian of policyholders' interests (see also comments
smoothing, but that any reduction would reflect adverse market conditions. A position where the Society could not afford
to honour the policy values without rising market values or inter-generational transfers would not have been understood
by the Society's policyholders on the information provided to them, and would not have informed their reasonable
expectations." (par. 220, chapter 18, WE 16).
1
The fact that ELAS did not have to reserve for un-guaranteed bonuses is explained in the section on Article 18, Technical
Provisions. The 3LD made this reserving optional, and thus the UK did not force companies to reserve for these liabilities.
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on Article 10 of the 3LD).
Several pieces of evidence received claim that at different points in time ELAS might not
have had sound administrative and accounting procedures nor adequate internal control
mechanisms, because no action was taken to solve a serious problem that arose with the AA
of ELAS.
Mr. LAKE explains in H1 how in 1992, "Appointed Actuary Roy Ranson became CEO of
ELAS without relinquishing the role of Appointed Actuary, which was clearly prejudicial to
the interests of policyholders, but UK legislation did not provide for the removal of Mr
Ranson”. According to the evidence, the UK GAD (Government Actuary's Department)
explicitly expressed its disapproval of this dual role but no action followed. Clive
MAXWELL from HMT, under questioning during H4, rejects this claim, arguing that the
3LD does not mention the figure of the AA and that this is not therefore a matter for the
Directive. However, another competing view claims the contrary, viz. that the fact that the
Directive itself does not mention the figure of the AA is actually irrelevant because, once in
place, the AA figure became part of the UK supervisory system which, as a whole, had to
implement fully and correctly the provisions of Article 8 of the 3LD, both in terms of the
letter and the aim of the text.
The overall evidence received (see also section II.2. ‘Further evidence on transposition’)
suggests that by not taking swift action on this matter, the UK regulator did not fulfil its
obligation to require from ELAS sound administrative and accounting procedures and
adequate internal control mechanisms, as demanded explicitly by Article 8 of the 3LD.
3. Home/host exchange of information
Another issue is whether other Member States (Ireland, Germany) ever considered that ELAS'
activities might have had a negative effect on the company’s financial soundness, in which
case they should have informed the UK authorities. Correspondence between regulators to
which this committee has had access is examined in detail in Part IV (Redress issues).
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Article 10 - Accounting, prudential and statistical information supervisory powers (art. 23 of
1LD and 13 of CD)
Summary of objectives
Article 10 defines the type of information required from companies on their financial
situation. They must render the returns and documents necessary for supervision on a periodic
basis. Member States need to ensure that the competent authorities have the powers and
means necessary for the supervision of assurance undertakings with head offices within their
territories, including business carried on outside those territories. These powers and means
must allow them to:
a) make detailed enquiries, for example by gathering information or requiring the submission
of documents, or carrying out on-the-spot investigations;
b) take any measures that are appropriate and necessary to ensure that the business complies
with the law and to prevent or remedy any irregularities prejudicial to the interests of the
assured persons;
c) ensure that those measures are carried out, if need be by enforcement, or through judicial
channels.
Text of the article
Article 10
Article 23 (2) and (3) of Directive 79/267/EEC shall be replaced by the following:
'2. Member States shall require assurance undertakings with head offices within their territories to render periodically the
returns, together with statistical documents, which are necessary for the purposes of supervision. The competent authorities
shall provide each other with any documents and information that are useful for the purposes of supervision.
3. Every Member State shall take all steps necessary to ensure that the competent authorities have the powers and means
necessary for the supervision of the business of assurance undertakings with head offices within their territories, including
business carried on outside those territories, in accordance with the Council directives governing those activities and for the
purpose of seeing that they are implemented.
These powers and means must, in particular, enable the competent authorities to:
(a) make detailed enquiries regarding the undertaking's situation and the whole of its business, inter alia by:
- gathering information or requiring the submission of documents concerning its assurance business,
- carrying out on-the-spot investigations at the undertaking's premises;
(b) take any measures, with regard to the undertaking, its directors or managers or the persons who control it, that are
appropriate and necessary to ensure that the undertaking's business continues to comply with the laws, regulations and
administrative provisions with which the undertaking must comply in each Member State and in particular with the scheme of
operations in so far as it remains mandatory, and to prevent or remedy any irregularities prejudicial to the interests of the
assured persons;
(c) ensure that those measures are carried out, if need be by enforcement, where appropriate through judicial channels.
Member States may also make provision for the competent authorities to obtain any information regarding contracts which
are held by intermediaries.'
Comments on UK transposition
The obligation to produce annual reports and accounts is required by the Companies Act
1985 (statutory returns). The obligation to submit the regulatory returns is required by the
ICA 1982, which establishes that every insurance company must submit every year to the
prudential regulator, in addition to the statutory returns, the regulatory returns. They are
prepared taking into account the valuation of assets and liabilities regulations and thus the
net asset figure calculated in the return is very unlikely to be the same as the net asset figure
appearing in the company’s published financial statements. The regulatory returns are
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designed to allow the regulator to monitor the solvency of the insurer. The forms and contents
of the regulatory returns were originally regulated by the Insurance Companies (Accounts
and Statements) Regulations 1983. Such Regulations were amended on various occasions,
including by the Insurance Companies (Accounts and Statements) (Amendment) Regulations
1994 to implement the Third Life and Non-Life Directives to the extent that they affect the
form and contents of the annual returns. In 1996, the 1983 Regulations, as amended, were
consolidated with modifications by the Insurance Companies (Accounts and Statements)
Regulations 1996.
The returns are made up of a balance sheet, a profit and loss account, a revenue account, an
abstract of the actuary’s annual valuation report and additional information on general
business and on long-term business. Additional information must be submitted in the form of
statements which must provide information on, inter alia, major treaty and facultative
reinsurers, company’s policy on investment in derivatives and details of all controllers of the
company, including their name and the shareholding held. The ICA 1982 establishes three
mechanisms to enhance the reliability of the regulatory returns: a) the Act makes it an offence
knowingly or recklessly to cause or permit a statement which is false in a material particular
to be included in a return; b) the directors of a company are required to certify that the return
has been properly prepared and that the solvency requirements have been complied with; c)
in the case of a company carrying on long-term business, the appointed actuary must also
certify whether, in his opinion, proper provision has been made with respect to its liabilities;
d) returns must be audited. Although the annual return is primarily intended to enable the
regulator to monitor the solvency of insurers, it is also available on request to policyholders
and shareholders and open to public inspection at the appropriate Companies House.
For life assurers, the appointed actuary must produce an annual valuation report to enable
the regulator to form an opinion as to whether the minimum standards set out in the
appropriate rules are met by the actuarial reserves. The appointed actuary must also prepare
a statement of its long-term business at least once every five years.
The requirement in UK legislation that every insurance company appoint an actuary as the
actuary of the company is not a requirement of the 3LD. The actuary must possess the
prescribed qualifications, i.e. he/she must be a fellow of the Institute of Actuaries or of the
Faculty of Actuaries. The appointment of the Actuary must be notified to the Secretary of
State and a statement with information on the actuary’s interests in the company (e.g. shares
or debentures of the company in which the actuary had an interest, particulars of any
pecuniary interest of the actuary in any transaction between the actuary and the company,
remuneration and other benefits received by the Actuary, etc.). This information must be
provided to the Secretary of State on a yearly basis.
The obligation to provide statistical information is prescribed by Regulations 79 to 83 of the
Insurance Companies Regulations 1994. The forms to be used are set out in Schedules 15 and
16 of those Regulations. The statistical information must be submitted on a yearly basis.
Default in complying with these obligations is an offence.
Supervisory powers of competent authorities: UK legislation attributes to the Secretary of
State a wide range of powers to perform his supervisory duties, equivalent to those required
by Article 10 of the 3LD. Sections 37 to 47 of the ICA 1982, as amended, list those powers
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and stipulate the grounds on which they can be exercised and the formalities that must be
observed when exercising them. Under the ICA 1982 the Secretary of State has ample powers
to obtain information from and to investigate insurance companies. Under those powers, the
Secretary of State may request the appointed actuary to make an investigation into the
company’s financial condition or he can appoint a person to investigate whether the criteria
of sound and prudent management has been fulfilled. The Secretary of State, or a person
authorised by him, may require a company to furnish him with information about specific
matters and to produce books, papers or other documents as may be specified. If the
Secretary of State considers there are reasonable grounds for believing that documents whose
submission has been required and which have not been produced are held on any premises,
he may request a justice of the peace to issue a warrant authorising a constable to enter and
search the premises.
Powers over the company’s assets: The Secretary of State may require the assets of a
company used to cover its liabilities to be maintained in the UK. He can also require the
whole or a specified proportion of those assets to be held by a person approved by him as
trustee for the company. Finally, he can apply before a court for an injunction to restrict the
company’s freedom to dispose of its assets. These powers can only be exercised on the basis
of a narrower set of grounds. The exercise of these powers, in particular the power to restrict
a company’s freedom to dispose of its assets, is also subject to more stringent formalities.
The Secretary of State may also impose requirements on investments (in so far as the value of
its assets does not exceed the amount of its liabilities), limit premium income and require
further and earlier information. The list of powers enumerated by the Act closes with a broad
residual power which entitles the Secretary of State to require a company to take such action
as appears appropriate to him for the purpose of protecting policyholders against the risk
that the company may be unable to meet its liabilities or to fulfil the reasonable expectations
of policyholders or potential policyholders and for the purpose of ensuring that the company
observes sound and prudent management principles.
Failure to comply with a requirement imposed in the exercise of any of the powers mentioned
above is an offence. According to the ICA 1982, the Secretary of State is equipped with
comprehensive powers to discharge his duties and neither the formalities he has to observe
nor the set of grounds that he must invoke may impose severe restrictions on him in exercising
those powers. On the contrary, the exercise of most powers (other than the restriction of a
company’s freedom to dispose of its assets) is subject to a flexible and vaguely defined
threshold, i.e. the protection of the reasonable expectations of policyholders or potential
policyholders. Ultimately, the Secretary of State may intervene on almost any occasion he
considers desirable (rather than necessary) for the protection of policyholders and not just
when specific infringements or shortcomings have been identified.
Link to the ELAS case
Three elements of this article link it to the ELAS case. First, the issue of the "powers and
means” of the regulators; secondly, the question of ‘excessive respectful treatment’; thirdly,
the obligation of regulators to ensure that ELAS complied with national law, which, as
explained previously, includes the concept of PRE.
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1. Powers and means
It is necessary to ask, first of all, whether the UK regulator had the "powers and means
necessary" to perform its functions at the time. Numerous pieces of evidence point to
weaknesses in terms of ‘means’; on the other hand, the evidence received clearly
demonstrates that, as far as ‘powers’ were concerned, the regulators had clearly enough.
1.A. The ‘means’
According to Mr. LAKE in H1, the "insurance regulators were seriously under-resourced
throughout the 1990s". He supports his claim by citing the Baird report (WE 17), likewise
cited by Mr. HOLMES (WE 84) when referring to the breakdown of staff involved in
insurance regulation on 1 January 1999: “... the total number of staff involved in the
prudential regulation of approximately 200 insurance companies (…) was less than 135. By
way of comparison, there were approximately 135 staff involved in the regulation of 400
authorised UK banks, building societies and UK branches of non-EU institutions” (WE 17,
paragraph 2.23.5).
Mr. NASSIM (WE7) similarly claims that "the regulators were not always sufficiently
resourced and did not all possess the necessary skills to make an effective contribution to the
regulatory process and responsibly exercise discretionary powers as intended by Parliament
from 1973 onwards. As a consequence, they did not properly undertake their functions."
The Penrose report (WE 16, par. 158) also states that "the DTI insurance division was illequipped to participate in the regulatory process. It had inadequate staff and those involved
at line supervisor level in particular were not qualified to make any significant contribution to
the process. Insurance division regulators were fundamentally dependent on GAD for advice
on the mathematical reserves, implicit items, technical matters generally and PRE and were
not individually equipped with specific relevant skills or experience to assess independently
the Society's position in these respects (…). For all practical purposes, scrutiny of the
actuarial functioning of life offices was in the hands of GAD until the reorganisation under
FSA was in place". It adds that "the staffing levels available to the prudential regulators
varied but the number of staff with direct responsibility for the Society and their grades within
the civil service remained broadly constant ... Increased resources might have improved the
chances of identifying problems but... Government required a 'light touch' approach to
regulation and allocated resources accordingly "(WE16, par. 39, 158 and159).
Finally, Mr. HOLMES (WE 84) concludes by stating that “even allowing for the discretion
which Member States possess in deciding upon an appropriate level of regulatory resources,
it must be open to doubt whether the UK provided its competent authorities with the means
necessary for supervision, the standard explicitly laid down in the Community legislation
since November 1992. On the one hand, it must be asked whether in numerical terms
sufficient staff were devoted to the task. On the other hand, it must also be asked whether the
personnel that were available were appropriately qualified to provide supervision which was
effective.” (See also section II.2. ‘Further evidence on transposition’)
1.B. The ‘powers’
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In terms of the powers allocated to the UK regulators, most evidence points to a satisfactory
situation where the competent authority had ample, flexible and sufficient powers.
The UK's implementing provisions transposing Article 10 give the Secretary of State very
comprehensive powers to perform his supervisory functions, his powers in principle at least
equivalent to those required by the Directive. These powers include the possibility to force a
company to protect policyholders against the risk that the company may be unable to meet its
liabilities or to fulfil policyholders' and potential policyholders' reasonable expectations
(PRE)1 for the purpose of ensuring that the company observes sound and prudent management
principles. The question that arises in the ELAS case is not so much whether the Secretary of
State had enough powers, which he ostensibly did, but whether he made good use of these
extensive powers: Some of the evidence collected so far seems to negate the latter (for detail,
see comments on section 3 on PRE). See also section II.2. ‘Further evidence on transposition’.
It can therefore be argued that the UK regulators did indeed have at least the ‘powers’
required by the Directive, if not necessarily the ‘means’.
2. Respectful treatment and light touch
The second key issue relating to Article 10 is whether the UK regulator made detailed
enquiries, by requiring the submission of documents or carrying out on-the-spot
investigations. It has been alleged that investigations were indeed carried out but that
regulators were always excessively respectful and even fearful of the ELAS management. In
WE 51, Mrs KWANTES says: "I think the truth was the regulators were asleep at the wheel.
They appeared to stand in awe of Equitable and handled it with kid gloves. If the regulator
was aware that Equitable had problems, why didn't they say something? If they were not
aware, they were not doing their job of regulation properly."
Referring to the ELAS collapse, Mr. BAYLISS in H5 states that "I do not think there will be
another one entirely related to the arrogance of the management and the tolerance of that
arrogance. The way in which Equitable behaved and treated the regulator was really quite
extraordinary."
Another petitioner, Mr. BELLORD (H2) also insists on the "very cosy relationship between
regulators and EL", highlighting some findings by the Penrose Report that suggest that
reports available to the GAD dating back to the late 1980s had already hinted at ELAS'
dangerous business practices but had remained totally unheeded by the GAD.
More evidence also strongly suggests that the regulator adopted a conscious and deliberate
‘hands-off’ approach with regards to the ELAS case. If this were proven to be the case, it
would constitute a breach of the regulators’ obligation to ensure the respect of PRE and
therefore a breach of the letter and aim of Article 10 of the 3LD. Both the Baird (WE 17) and
Penrose (WE 16) reports contain criticisms of the regulator’s lack of a "pro-active approach".
M. LAKE claims in H1 that an “over-reliance on industry-led agencies and the traditional
1
As has been mentioned in the section covering article 8, in UK law includes the concept of policy-holders reasonable
expectations (PRE).
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'light touch' approach" made the UK reluctant to adopt the aim of the life directives, thus
failing in their implementation as well as in their execution.
Some of these allegations, in particular the "lack of challenge to ELAS' senior management by
the UK regulators" are emphatically rejected by WE-CONF8. The findings of the First
Parliamentary Ombudsman's report also deny these allegations, saying that the FSA (together
with GAD) could not be said to have addressed the GAR reserving issue and any
misrepresentation of ELAS' financial position "in anything less than a resolute manner", that
their approach could not be described as 'passive' and that the "FSA continued to insist
throughout that Equitable conform to their full reserving requirements in the face of strong
resistance from Equitable".
3. PRE
As was mentioned earlier in the section covering Article 8, UK law gives power to the
Secretary of State to force a company to protect policyholders against the risk that the
company may be unable to meet its liabilities or to fulfil PRE. The Secretary of State can take
any action that appears to him to be appropriate (other than restricting the company’s freedom
to dispose of its assets) against the risk that the company may be unable to fulfil those
expectations. In this sense, UK law respects the requirements of Article 10 of the 3LD, which
requires authorities to take any measures that are appropriate and necessary to ensure that the
company's business continues to comply with the laws of the UK and to prevent or remedy
any irregularities prejudicial to the interests of the assured persons. To summarize, Article 10
of the 3LD required that UK authorities be given the powers and means to ensure that the
PRE were respected.
It has already been established that the means were possibly insufficient but that the powers
were adequate. The question that arises in the ELAS case is whether the Secretary of State
made good use of these extensive powers: were these powers used to protect PRE? Evidence
received1 claims that there were indeed possible irregularities prejudicial to the interests of the
assured persons but that the UK regulator did not take the appropriate measures to correct
them. This evidence seems to suggest that for many years the regulators in the UK did not
exercise their extensive powers with respect to ELAS, despite having knowledge about the
impending catastrophe. A review2 of the DTI’s annual reports notes that the most common
ground on the basis of which the Secretary of State had exercised his powers was that a
company was newly authorised (i.e., within the last five years) or that there had been a change
of control (again, within the last five years). Only in a handful of cases each year did the
Secretary of State exercise his powers on other grounds. This lack of pro-activeness, despite
having the adequate powers, was also referred to by Charles THOMSON, current CEO of
ELAS, when he declared in H2 that "for many years the Regulators in the UK had very
extensive powers to raise questions with companies and considerable powers to intervene in
exceptional cases [...]. In short, my view is that the relevant regulators in the UK, both before
and after the changes made as a consequence of the consolidated life directive, had sufficient
powers to regulate effectively."
1
2
WE 84, 72, 69, 51-54, 42, 36, 33, 26
ES 1, Study on transposition commissioned by the EQUI committee.
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Mr. LAKE in H1 also supports this view by claiming that "in UK law the PRE have the
protection of the competent authorities" and that the UK "did not implement the legal
requirements to enable the authorities to monitor the application of its own law in respect of
PRE", despite it being appropriate and necessary, thus possibly breaching the letter and spirit
of Article 10.
One specific reason why PRE were not respected is related to the solvency margin (for more
detail, see section on Article 25, Solvency margin). The argument goes as follows: the
regulator allowed ELAS to fulfil its solvency requirements, despite the dubious financial
situation in which the company found itself. This is, in effect, tantamount to hiding the true
financial situation of ELAS from policyholders and endangering the company’s future
financial viability. Consequently, PRE were put at risk and thus it would follow that UK
regulators took measures that were not “appropriate and necessary to prevent or remedy any
irregularities prejudicial to the interests of the assured persons” and ensure that the business
complied with UK law, i.e., PRE. This raises the possibility of a breach of Article 10 (PRE)
via a possible breach of Article 25 (solvency margin).
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Article 18 - Establishment of technical provisions (Articles 17 of 1LD and 20 of CD)
Summary of objectives
This article deals with the requirement of every assurance company to establish sufficient
technical provisions in respect of its entire business. It also provides for rules for the
calculation of the technical reserves, establishing a number of principles, which call for a
“prudent prospective actuarial valuation” and for a prudent rate of interest, placing on the
home Member State regulator the obligation to fix one or more maximum rates of interest.
The bases and methods used in the calculation of technical provisions must be made available
to the public. Furthermore, all technical provisions must be covered by matching assets. It
also imposes an obligation to localise those assets within the Community.
Text of the article
Article 18
Article 17 of Directive 79/267/EEC shall be replaced by the following:
'Article 17
1. The home Member State shall require every assurance undertaking to establish sufficient technical provisions, including
mathematical provisions, in respect of its entire business.
The amount of such technical provisions shall be determined according to the following principles:
A. (i) The amount of the technical life-assurance provisions shall be calculated by a sufficiently prudent prospective actuarial
valuation, taking account of all future liabilities as determined by the policy conditions for each existing contract, including:
- all guaranteed benefits, including guaranteed surrender values,
-bonuses to which policy-holders are already either collectively or individually entitled, however those bonuses are described
- vested, declared or allotted,
- all options available to the policy-holder under the terms of the contract,
- expenses, including commissions;
-taking credit for future premiums due;
(ii) the use of a retrospective method is allowed, if it can be shown that the resulting technical provisions are not lower than
would be required under a sufficiently prudent prospective calculation or if a prospective method cannot be used for the type
of contract involved;
(iii) a prudent valuation is not a "best estimate" valuation, but shall include an appropriate margin for adverse deviation of
the relevant factors;
(iv) the method of valuation for the technical provisions must not only be prudent in itself, but must also be so having regard
to the method of valuation for the assets covering those provisions;
(v) technical provisions shall be calculated separately for each contract. The use of appropriate approximations or
generalizations is allowed, however, where they are likely to give approximately the same result as individual calculations.
The principle of separate calculation shall in no way prevent the establishment of additional provisions for general risks
which are not individualized;
(vi) where the surrender value of a contract is guaranteed, the amount of the mathematical provisions for the contract at any
time shall be at least as great as the value guaranteed at that time.
B. The rate of interest used shall be chosen prudently. It shall be determined in accordance with the rules of the competent
authority in the home Member State, applying the following principles:
(a) for all contracts, the competent authority of the undertaking's home Member State shall fix one or more maximum rates of
interest, in particular in accordance with the following rules:
(i) when contracts contain an interest rate guarantee, the competent authority in the home Member State shall set a single
maximum rate of interest. It may differ according to the currency in which the contract is denominated, provided that it is not
more than 60 % of the rate on bond issues by the State in whose currency the contract is denominated. In the case of a
contract denominated in ecus, this limit shall be set by reference to ecu-denominated issues by the Community institutions.
If a Member State decides, pursuant to the second sentence of the preceding paragraph, to set a maximum rate of interest for
contracts denominated in another Member State's currency, it shall first consult the competent authority of the Member State
in whose currency the contract is denominated;
(ii) however, when the assets of the undertaking are not valued at their purchase price, a Member State may stipulate that
one or more maximum rates may be calculated taking into account the yield on the corresponding assets currently held,
minus a prudential margin and, in particular for contracts with periodic premiums, furthermore taking into account the
anticipated yield on future assets. The prudential margin and the maximum rate or rates of interest applied to the anticipated
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yield on future assets shall be fixed by the competent authority of the home Member State;
(b) the establishment of a maximum rate of interest shall not imply that the undertaking is bound to use a rate as high as that;
(c) the home Member State may decide not to apply (a) to the following categories of contracts:
- unit-linked contracts,
- single-premium contracts for a period of up to eight years,
- without-profits contracts, and annuity contracts with no surrender value.
In the cases referred to in the last two indents of the first subparagraph, in choosing a prudent rate of interest, account may
be taken of the currency in which the contract is denominated and corresponding assets currently held and where the
undertaking's assets are valued at their current value, the anticipated yield on future assets.
Under no circumstances may the rate of interest used be higher than the yield on assets as calculated in accordance with the
accounting rules in the home Member State, less an appropriate deduction;
(d) the Member State shall require an undertaking to set aside in its accounts a provision to meet interest-rate commitments
vis-à-vis policy-holders if the present or foreseeable yield on the undertaking's assets is insufficient to cover those
commitments;
(e) the Commission and the competent authorities of the Member States which so request shall be notified of the maximum
rates of interest set under (a).
C. The statistical elements of the valuation and the allowance for expenses used shall be chosen prudently, having regard to
the State of the commitment, the type of policy and the administrative costs and commissions expected to be incurred.
D. In the case of participating contracts, the method of calculation for technical provisions may take into account, either
implicitly or explicitly, future bonuses of all kinds, in a manner consistent with the other assumptions on future experience
and with the current method of distribution of bonuses.
E. Allowance for future expenses may be made implicitly, for instance by the use of future premiums net of management
charges. However, the overall allowance, implicit or explicit, shall be not less than a prudent estimate of the relevant future
expenses.
F. The method of calculation of technical provisions shall not be subject to discontinuities from year to year arising from
arbitrary changes to the method or the bases of calculation and shall be such as to recognize the distribution of profits in an
appropriate way over the duration of each policy.
2. Assurance undertakings shall make available to the public the bases and methods used in the calculation of the technical
provisions, including provisions for bonuses.
3. The home Member State shall require every assurance undertaking to cover the technical provisions in respect of its entire
business by matching assets, in accordance with Article 24 of Directive 92/96/EEC. In respect of business written in the
Community, these assets must be localized within the Community. Member States shall not require assurance undertakings to
localize their assets in a particular Member State. The home Member State may, however, permit relaxations in the rules on
the localization of assets.
4. If the home Member State allows any technical provisions to be covered by claims against reassurers, it shall fix the
percentage so allowed. In such case, it may not require the localization of the assets representing such claims.'
Comments on UK transposition
Home/host Member State obligations: the supervisory powers of the competent authorities of
the home Member State need to cover the “entire business” of the companies established in
their territory. At UK level, the expansion of the supervisory powers of the Secretary of State
over companies established in the UK over their entire business – within and outside the UK
– was implemented by the Insurance Companies (Amendment) Regulations 1994.
Regulation 4 of these regulations amends section 15 of the ICA 1982, which determines the
scope of application of Part II – Regulation of Insurance Companies. Regulation 4 prescribes
that Part II of the Act applies, amongst other things, to “all UK companies which carry on
business in a Member State other than the United Kingdom”. The limitation of the
supervisory powers of the Secretary of State was also implemented by the Insurance
Companies (Third Insurance Directives) Regulations 1994. Regulation 13 of the Third
Insurance Directives inserted paragraph 1A to section 15 of the ICA 1982, which basically
excludes EC companies from the application of Part II of the Insurance Companies Act in so
far as those companies are carrying on insurance business through a branch and have
complied with the requirements specified in Part I of Schedule 2F to the Act. Regulation 45 of
the 3LD inserted Schedule 2F to the ICA 1982. This Schedule is the core regulation in terms
of the definition of the rights and obligations of the UK supervisory authorities with respect to
EC companies that carry out activities in the UK either via a branch or via the provision of
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cross border services. More specifically, Regulations 15 and 16 modify sections 34 and 35 of
the ICA 1982, rightly limiting the Secretary of State’s power to control the value, nature and
localisation of the assets of the EC companies operating in their territory.
Rules on the calculation of technical provisions: UK rules on the valuation of long-term
liabilities are set out by the Insurance Companies Regulations 1994. The main principles for
valuing the amount of the liabilities are set out in Regulation 64, which provides as follows:
“The determination of the amount of long-term liabilities (other than liabilities which have
fallen due for payment before the valuation date) shall be made on actuarial principles which
have due regard to the reasonable expectations of policy holders and shall make proper
provision for all liabilities on prudent assumptions that shall include appropriate margins for
adverse deviation of the relevant factors. The determination shall take account of all
prospective liabilities as determined by the policy conditions for each existing contract, taking
credit for premiums payable after the valuation date. (3) Without prejudice to the generality
of paragraph (1) above, the amount of the long-term liabilities shall be determined in
compliance with each of regulations 65 to 75 below and shall take into account, inter alia, the
following factors: all guaranteed benefits, including guaranteed surrender values; vested,
declared or allotted bonuses to which policyholders are already either collectively or
individually contractually entitled; all options available to the policyholder under the terms of
the contract; expenses, including commissions; any rights under contracts of reinsurance in
respect of long-term business; discretionary charges and deductions, in so far as they do not
exceed the reasonable expectations of policyholders”. The principles referred to in
Regulation 64 appear to be in line with those prescribed by the Directive, with an additional
reference, not mentioned by the Directive, to pay due regard to the reasonable expectations of
policyholders.
The “actuarial principles” are set out in two Guidance Notes prepared by the Faculty and the
Institute, GN1 and GN8, which are designated as “practice standard”, meaning they are in
effect mandatory for Appointed Actuaries.
Both the Directive and UK legislation explicitly mention that a prudent prospective actuarial
valuation of an assurance’s liabilities must take into account all future liabilities as
determined by the policy conditions for each existing contract, including guaranteed benefits,
bonuses and contractual options for policyholders. In turn, the Directive further specifies
that, where the surrender value of a contract is guaranteed, the amount of the mathematical
provision for the contract at any time must be as great as the value guaranteed at that time.
UK legislation does not replicate this provision but includes a specific Regulation on reserves
for policyholders’ options, which provides as follows: “(1) Provision shall be made on
prudent assumptions to cover any increase in liabilities caused by policyholders exercising
options under their contracts. (2) Where a contract includes an option whereby the
policyholder could secure a guaranteed cash payment within twelve months following the
valuation date, the provision for that option shall be such as to ensure that the value placed
on the contract is not less than the amount required to provide for the payments that would
have to be made if the option were exercised.”
Regulations 65 to 75 prescribe more specific criteria on the determination of the amount of
liabilities: Regulation 65 prescribes, in line with the 3LD that, in principle, long-term
liabilities must be determined separately for each contract by a prospective calculation. The
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regulation allows the exceptional use of appropriate approximations and generalisation and
the use of the retrospective method, subjecting both exceptions to the same conditions as those
prescribed by the Directive. The regulation prescribes that, where necessary, additional
amounts must be set aside for general risks not individualised and also prescribes that the
method of calculation must not be subject to arbitrary changes from year to year.
Regulation 69 on rates of interest to be used in calculating the present value of future
payments by or to an insurance company sets out prudential standards equivalent to those
laid down by the Directive. The same is true of Regulations 68 and 71 on allowances for
expenses. In line with the Directive, domestic legislation requires the company to disclose
such information to the competent authority as part of the requested information to support
an application for an authorisation to operate. Further information on this is found in the
actuary’s annual valuation report, which is available on request to policyholders and
shareholders and open to public inspection at the appropriate Companies House.
Matching rule obligation: The 3LD prevents Member States from requiring companies to
localise their assets in a particular Member State. It also allows the home Member State to
permit relaxations of the localisation of assets rules. UK legislation does include regulations
which, under particular circumstances, do require assurance undertakings to localise some
or all of their assets in a particular place. Firstly, Regulation 31 of the Insurance Companies
Regulations 1994 prescribes that the assets that cover liabilities in sterling must be held in
the EC and the assets that cover liabilities in any other currency must be held in the EC or in
the country of that currency. Secondly, Regulation 33 of the Insurance Companies
Regulations 1994 prescribes some asset localisation obligations for non-EC companies,
whose head office is not in an EFTA State, in respect of their assets representing a UK
margin of solvency maintained under section 32(2)(b) of the Act. Thirdly, sections 39 and 40
of the Act afford the Secretary of State, under certain circumstances, the power to require a
UK company to localise in the EC assets equal to the whole or a specified proportion of the
amount of its domestic liabilities and to impose some kind of custody over them. According to
section 37(3), those powers are not exercisable unless the company has failed to satisfy
certain obligations to which it is or was subject, including the failure to determine the value
of its liabilities in accordance with the regulations. Regulation 27 prescribes that the
company must hold sufficient assets in a particular currency to cover the company’s liabilities
in that particular currency only if the company’s liabilities in that particular currency exceed
5% of its total liabilities. According to the Directive, by contrast, there is no 5% leeway
before the matching obligation is triggered, but this is not a departure from the Directive’s
matching obligation because the Directive itself allows Member States to introduce
exceptions to that obligation.
Link to the ELAS case
There are two aspects connecting this article to the ELAS case: first, the ‘entire business’
argument, linked to the optional reserving of discretionary bonuses, and second, the issue of
PRE, which appears once again.
1. 'Entire business' argument and optional reserving of discretionary bonuses
Article 18 required the UK to ensure that Equitable Life established sufficient technical
provisions, including mathematical provisions, in respect of its entire business, using a
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sufficiently prudent prospective actuarial valuation (this article therefore reiterates the ‘entire
business’ requirement, already mentioned explicitly in Article 8). Neither the Directive nor
UK legislation elaborate any further on the meaning of "prudent valuation", which is left for
actuarial judgement. This is an important point, given that what ELAS did was to build up
reserves for reversionary bonuses1 (those already declared bonuses which are contractual
benefits) but did not reserve for future reversionary bonuses and terminal bonuses, which are
given at the discretion of the insurance company. According to some of the evidence received,
this lack of reserving was one of the reasons for the company's downfall2. The importance of
these bonuses and their link to the GAR issue is explained at length in Part I (Introduction)
and Part III (Regulatory issues).
The Directive only requires that future liabilities include, apart from all guaranteed benefits,
bonuses to which policyholders are already either collectively or individually entitled,
however those bonuses are described - vested, declared or allotted. Neither UK regulations
nor the Directive require the establishment of additional technical reserves especially for
future reversionary bonuses and terminal bonuses which are given at the discretion of the
insurance company rather than as the result of a contractual obligation. The 3LD leaves open
as an option (section 1.D) for the Member State regulator the requirement to reserve for these
discretionary future bonuses (reserving of “future bonuses of all kinds”).
Nicholas BELLORD claims that this was deliberate, as he states (H2) that "when it came to
the third life directive being drafted, it was found that stricter reserving requirements were
being proposed and the UK delegation was supporting these stricter requirements. However,
the Treasury, the regulators, realised that, if this directive went ahead as drafted, it might
reveal the truth about Equitable and therefore they scotched the idea by making the reserving
optional (…). So the option existed to have proper reserving but the UK regulators
deliberately did not take advantage of that option."
In addition, another interpretation (WE Conf 11) argues that when the Directive requires
sufficient technical provisions in respect of its entire business, that is exactly what it means
without any ambiguity, i.e., the technical provisions need to be calculated not only in respect
of its contractual benefits but also of its future reversionary bonuses and terminal bonuses.
Lord Penrose (WE 16) reinforces this point when he says that the regulator was focused
exclusively on solvency margins and took no account of accrued terminal bonus, with the
implication that supervision should include verification of a company's entire business and not
just its state of solvency (see also similar arguments in the section on Article 8).
According to the various pieces of evidence mentioned above, the line of reasoning goes as
follows: it is true that the option contained in section 1.D does not force the regulator to
1
WE 79 claims that ELAS did not even reserve prudently enough for future guaranteed bonuses to which holders of
investment policies were contractually entitled nor did they make proper provision for guarantees in the contracts (such as
GARs).
2 The ruling of the House of Lords on the Hyman case (Equitable Life Assurance Society v. Hyman [2000] 3 WLR 529.) was
the event that sparked ELAS’ misfortune. The House of Lords ruled that ELAS did not have discretion under its articles of
association to adopt a differential bonus policy according to whether a policy holder with a guaranteed annuity rate option
(GAR) decided to take benefits at guaranteed rates rather than current rates. This meant that ELAS could not reduce the size
of the final bonuses paid to its GAR policyholders and had to pay them what had been promised. But ELAS had no money to
do so: it had not properly reserved for final bonuses and GAR liabilities throughout the years, creating an ever-growing asset
shortfall. Proper reserving might have avoided or reduced the extent of the catastrophe.
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require reserving of “future bonuses of all kinds” (e.g., discretionary bonuses); however,
discretionary bonuses are still an integral part of the company's ‘entire business’, viz.: the
option exists does not exonerate the UK authorities from doing their utmost to respect the
letter and the aim of the directive. Evidence received by the committee suggests that by not
taking into account accrued terminal bonuses (discretionary bonuses) in its overall analysis of
the financial health of the company and by focusing exclusively on solvency margins, the
regulator disregarded the obligatory concept of ‘entire business’ and, possibly, did not respect
the letter and the aim of Article 18.
Lord Penrose states clearly (WE 16): the Directive "required prudent reserving for, or some
realistic account to be taken of, final bonus. This would have exposed the weakness of the
Society at a much earlier stage and would have prompted corrective action. DTI did not take
that opportunity (…). The UK regulations implementing the Directive left the position as it
had been previously."
2. PRE argument and the reserving of discretionary bonuses
As was mentioned in the sections relating to Articles 8 and 10, UK law goes beyond the
Directive by including a reference to pay due regard to the reasonable expectations of
policyholders (PRE) when determining the amount of long-term liabilities. In the context of
the ELAS case, one line of argument has it that one of aspect of PRE was that they did indeed
expect to receive discretionary bonuses in addition to contractual benefits. The reasoning
continues by saying that if the UK authorities had followed through with their obligation to
ensure the respect of PRE, this would have led to a more conservative estimation of the
company’s liabilities and might have avoided the consequences of the ruling of the House of
Lords on the Hyman case, which was the event that sparked ELAS’ misfortune, as mentioned
previously.
This is expressed in another way by witness Mr. JOSEPHS in H2, who claims that "Equitable
insisted on treating all policies alike, whether they were written as ‘defined benefit’ contracts,
or in the later form as ‘investment’ contracts." The contracts "were written so as to give their
holders the absolute right to share in the investment return of the Society pro rata to net
premiums paid." According to his interpretation, Article 18 would have required that this right
be reflected in the calculated liabilities for those policies, which, according to Mr. JOSEPHS,
was not the case.
Were discretionary and non-contractual bonuses perceived to be included in PRE? As has
been explained at length in the section on Article 8, the UK regulators did not believe so.
However, from numerous pieces of evidence received by this committee, and starting with the
Penrose report (WE 16), it is possible to infer that discretionary and non-contractual bonuses
were an integral part of the package offered to policyholders, who had been led to expect that
these bonuses would be paid depending only on the state of the markets at the time of exiting
(see WE 26 Burgess Hodgson, WE 52-54 Seymour, H5 Lloyd).
To conclude, the argument in terms of Article 18 goes as follows: if the UK authorities were
obliged to respect PRE, they should also have made sure that ELAS’ reserves covered
discretionary and final bonuses. By not considering discretionary bonuses as an integral part
of the company’s ‘entire business’ and not obliging ELAS to provide adequate technical
provisions for them, the UK regulators indirectly contributed to ELAS’ downfall at the time
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of the House of Lords ruling and therefore did not pay due regard to the PRE they were
supposed to defend, possibly breaching the letter and spirit of Article 18 of the 3LD.
For further information on this point, see Part III on Regulatory Action.
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Article 21 - Assets included/excluded in technical provisions (Article 23 of CD)
Summary of objectives
This article prescribes the type of assets that can be authorised to cover technical provisions
(Article 18) and lays down some principles on the valuation of the authorised assets. It also
gives power to the regulator to accept other categories of assets as cover for technical
provisions in exceptional circumstances and at an assurance undertaking's request. This must
be temporary and under a properly reasoned decision.
Text of the article
Article 21
1. The home Member State may not authorize assurance undertakings to cover their technical provisions with any but the
following categories of assets:
A. Investments
(a) debt securities, bonds and other money- and capital-market instruments;
(b) loans;
(c) shares and other variable-yield participations;
(d) units in undertakings for collective investment in transferable securities and other investment funds;
(e) land, buildings and immovable property rights;
B. Debts and claims
(f) debts owed by reassurers, including reassurers' shares of technical provisions;
(g) deposits with and debts owed by ceding undertakings;
(h) debts owed by policy-holders and intermediaries arising out of direct and reassurance operations;
(i) advances against policies;
(j) tax recoveries;
(k) claims against guarantee funds;
C. Others
(l) tangible fixed assets, other than land and buildings, valued on the basis of prudent amortization;
(m) cash at bank and in hand, deposits with credit institutions and any other body authorized to receive deposits;
(n) deferred acquisition costs;
(o) accrued interest and rent, other accrued income and prepayments;
(p) reversionary interests.
In the case of the association of underwriters known as Lloyd's, asset categories shall also include guarantees and letters of
credit issued by credit institutions within the meaning of Directive 77/780/EEC (¹) or by assurance undertakings, together
with verifiable sums arising out of life assurance policies, to the extent that they represent funds belonging to members.
(¹) First Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws, regulations and administrative
provisions relating to the taking up and pursuit of the business of credit institutions (OJ No L 322, 17. 12. 1977, p. 30).
Directive as last amended by Directive 89/646/EEC (OJ No L 386, 30. 12. 1989, p. 1).
The inclusion of any asset or category of assets listed in the first subparagraph shall not mean that all these assets should
automatically be accepted as cover for technical provisions. The home Member State shall lay down more detailed rules
fixing the conditions for the use of acceptable assets; in this connection, it may require valuable security or guarantees,
particularly in the case of debts owed by reassurers.
In determining and applying the rules which it lays down, the home Member State shall, in particular, ensure that the
following principles are complied with:
(i) assets covering technical provisions shall be valued net of any debts arising out of their acquisition;
(ii) all assets must be valued on a prudent basis, allowing for the risk of any amounts not being realizable. In particular,
tangible fixed assets other than land and buildings may be accepted as cover for technical provisions only if they are valued
on the basis of prudent amortization;
(iii) loans, whether to undertakings, to a State or international organization, to local or regional authorities or to natural
persons, may be accepted as cover for technical provisions only if there are sufficient guarantees as to their security, whether
these are based on the status of the borrower, mortgages, bank guarantees or guarantees granted by assurance undertakings
or other forms of security;
(iv) derivative instruments such as options, futures and swaps in connection with assets covering technical provisions may be
used in so far as they contribute to a reduction of investment risks or facilitate efficient portfolio management. They must be
valued on a prudent basis and may be taken into account in the valuation of the underlying assets;
(v) transferrable securities which are not dealt in on a regulated market may be accepted as cover for technical provisions
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only if they can be realized in the short term or if they are holdings in credits institutions, in assurance undertakings, within
the limits permitted by Article 8 of Directive 79/267/EEC, or in investment undertakings established in a Member State;
(vi) debts owed by and claims against a third party may be accepted as cover for the technical provisions only after
deduction of all amounts owed to the same third party;
(vii) the value of any debts and claims accepted as cover for technical provisions must be calculated on a prudent basis, with
due allowance for the risk of any amounts not being realizable. In particular, debts owed by policy-holders and
intermediaries arising out of assurance and reassurance operations may be accepted only in so far as they have been
outstanding for not more than three months;
(viii) where the assets held include an investment in a subsidiary undertaking which manages all or part of the assurance
undertaking's investments on its behalf, the home Member State must, when applying the rules and principles laid down in
this
Article, take into account the underlying assets held by the subsidiary undertaking; the home Member State may treat the
assets of other subsidiaries in the same way;
(ix) deferred acquisition costs may be accepted as cover for technical provisions only to the extent that this is consistent with
the calculation of the mathematical provisions.
2. Notwithstanding paragraph 1, in exceptional circumstances and at an assurance undertaking's request, the home Member
State may, temporarily and under a properly reasoned decision, accept other categories of assets as cover for technical
provisions, subject to Article 20.
Link to the ELAS case
This article is linked to the case within the terms of paragraph 2, which introduces an escape
clause to the closed list of categories of assets enumerated in point 1. According to this
provision, “in exceptional circumstances” and “at an assurance undertaking’s request”, the
home Member State may “temporarily” and “under a properly reasoned decision” accept
other categories of assets as cover for technical provisions.
This needs to be seen in the context of Article 25 on the Solvency margin. The issue at hand is
whether UK legislation gives the regulator (the Secretary of State) broader powers than those
prescribed by the Directive to waive regulations on the admissibility of assets for regulatory
purposes. At UK level, under section 68 of the 1982 ICA, the Secretary of State may, upon
request or with the consent from an insurer, waive the application of, amongst other things,
valuation of assets regulations to that particular company. The exercise of this power is not
constrained by the standards mentioned in the Directive (i.e. “exceptional circumstances”,
“temporarily”, “under properly reasoned decision”). The provision stipulates that the
Secretary of State’s decision “may be subject to conditions”, clearly attributing to the
regulator the discretion to decide whether to impose those conditions or not. These powers
seem to be broader than those prescribed by the Directive.
Such powers entail the risk of being exercised in a very lenient way, undermining the
application of harmonized standards. This raises some concerns as to the compatibility of
section 68 of the ICA 1982 with the 3LD. See further arguments in the section covering
Article 25 on the Solvency margin.
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Article 25 - Available solvency margin (Articles 18 of 1LD and 27 of CD, also amended by
Article 1.4 of Solvency I Directive, 2002/12/EC)
Summary of objectives
This article imposes the obligation to require from every assurance company an adequate
available solvency margin in respect of its entire business at all times. The solvency margin is
the value of assets over the amount of foreseeable liabilities, less any intangible items. The
article also lays down some conditions on the types of assets, which shall include: the paid-up
share capital or, in the case of a mutual, the effective initial fund plus any members' accounts
which must meet a series of criteria, viz.: one half of the unpaid share capital or initial fund;
reserves; profits brought forward; the cumulative preferential share capital and subordinated
loan capital, on an optional basis, and only up to 50 % of the margin; securities with no
specified maturity date and other instruments.
Text of the article
Article 25
Article 18, second subparagraph, point 1 of Directive 79/267/EEC shall be replaced by the following:
'1. the assets of the undertaking free of any foreseeable liabilities, less any intangible items. In particular the following shall
be included:
- the paid-up share capital or, in the case of a mutual assurance undertaking, the effective initial fund plus any members'
accounts which meet all the following criteria:
(a) the memorandum and articles of association must stipulate that payments may be made from these accounts to members
only in so far as this does not cause the solvency margin to fall below the required level, or, after the dissolution of the
undertaking, if all the undertaking's other debts have been settled;
(b) the memorandum and articles of association must stipulate, with respect to any such payments for reasons other than the
individual termination of membership, that the competent authorities must be notified at least one month in advance and can
prohibit the payment within that period;
(c) the relevant provisions of the memorandum and articles of association may be amended only after the competent
authorities have declared that they have no objection to the amendment, without prejudice to the criteria stated in (a) and
(b),
- one half of the unpaid share capital or initial fund, once the paid-up part amounts to 25 % of that share capital or fund,
- reserves (statutory reserves and free reserves) not corresponding to underwriting liabilities,
- any profits brought forward,
- cumulative preferential share capital and subordinated loan capital may be included but, if so, only up to 50 % of the
margin, no more than 25 % of which shall consist of subordinated loans with a fixed maturity, or fixed-term cumulative
preferential share capital, if the following minimum criteria are met:
(a) in the event of the bankruptcy or liquidation of the assurance undertaking, binding agreements must exist under which the
subordinated loan capital or preferential share capital ranks after the claims of all other creditors and is not to be repaid
until all other debts outstanding at the time have been settled.
Subordinated loan capital must also fulfil the following conditions:
(b) only fully paid-up funds may be taken into account;
(c) for loans with a fixed maturity, the original maturity must be at least five years. No later than one year before the
repayment date the assurance undertaking must submit to the competent authorities for their approval a plan showing how
the solvency margin will be kept at or brought to the required level at maturity, unless the extent to which the loan may rank
as a component of the solvency margin is gradually reduced during at least the last five years before the repayment date. The
competent authorities may authorize the early repayment of such loans provided application is made by the issuing
assurance undertaking and its solvency margin will not fall below the required level;
(d) loans the maturity of which is not fixed must be repayable only subject to five years' notice unless the loans are no longer
considered as a component of the solvency margin or unless the prior consent of the competent authorities is specifically
required for early repayment. In the latter event the assurance undertaking must notify the competent authorities at least six
months before the date of the proposed repayment, specifying the actual and required solvency margin both before and after
that repayment. The competent authorities shall authorize repayment only if the assurance undertaking's solvency margin
will not fall below the required level;
(e) the loan agreement must not include any clause providing that in specified circumstances, other than the winding-up of
the assurance undertaking, the debt will become repayable before the agreed repayment dates;
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(f) the loan agreement may be amended only after the competent authorities have declared that they have no objection to the
amendment,
- securities with no specified maturity date and other instruments that fulfil the following conditions, including cumulative
preferential shares other than those mentioned in the preceding indent, up to 50 % of the margin for the total of such
securities and the subordinated loan capital referred to in the preceding indent:
(a) they may not be repaid on the initiative of the bearer or without the prior consent of the competent authority;
(b) the contract of issue must enable the assurance undertaking to defer the payment of interest on the loan;
(c) the lender's claims on the assurance undertaking must rank entirely after those of all non-subordinated creditors;
(d) the documents governing the issue of the securities must provide for the loss-absorption capacity of the debt and unpaid
interest, while enabling the assurance undertaking to continue its business;
(e) only fully paid-up amounts may be taken into account.'
Comments on UK transposition
The solvency margin requirement: at UK level, section 32(1) of the ICA 1982, as amended,
requires every insurance company (to which Part II of the Act applies) whose head office is in
the UK to “maintain a margin of solvency of such amount as may be prescribed by or
determined in accordance with regulations made for the purpose of this section”, known as
the Required Minimum Margin (RMM). Section 32(5)(a) of the Act defines the margin of
solvency of an insurance company as “the excess of the value of its assets over the amount of
its liabilities, that value and amount being determined in accordance with any applicable
valuation regulations”. The Act does not stipulate the amount of the RMM nor any provision
on its composition, leaving both issues to be specified by statutory instruments.
In line with the Directive, the insurance company is obliged to maintain a margin of solvency
at least equal to the RMM at all times and not just at the year end. The RMM of a company
carrying on long-term business is the greater of:


the Minimum Guaranteed Fund (which, in the case of a mutual life insurer company,
is EUR 600,000)
the Required Margin of Solvency (RMS).
Composition of the solvency margin: the 3LD prescribes that the solvency margin must be
represented by assets free of any foreseeable liabilities, also known as ‘explicit assets’ and,
exceptionally, by ‘implicit’ or ‘intangible’ assets, provided an authorization from the
competent authority is obtained. Implicit items are assets of a long-term fund which are
intangible and result from the underestimation of assets or the overestimation of liabilities.
Insurance Companies Regulations 1994 also differentiates between explicit and implicit
items. Paragraph (3) of Regulation 22 requires that, of the assets covering a company’s
RMM, at least 50% of the Guarantee Fund (or, if greater, 100% of the Minimum Guarantee
Fund) be covered by ‘explicit assets’. Explicit assets are all types of assets other than implicit
items, which are expressly mentioned by the Regulations. According to Paragraph (1) of
Regulation 22, the Guarantee Fund is equivalent to one-third of the RMM. Therefore, the
effect of Regulation 22 is that one-sixth of the RMM must be covered by explicit assets, while
the remaining five-sixths of the RMM may be covered by implicit items.
Insurance Companies Regulations 1994 do not include a provision that lists the explicit and
implicit items the available solvency margin may consist of. However, they do include a
number of regulations that prescribe how assets and liabilities must be valued. Any asset not
mentioned in the valuation regulations other than cash (e.g. gold or commodities) is treated
as having no value and therefore must be excluded from the calculations. Once the assets are
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valued in accordance with the valuation of assets regulations, each category of assets must
then be compared to the admissibility limits prescribed by the regulations, which, in order to
spread the risk, limit the value of each category of assets that can be taken into account to
cover the company’s liabilities. The value of the assets that exceeds the liabilities that can be
taken into account to meet the company’s solvency requirements is subject to further
limitations, which are laid down by Regulation 23 of the Insurance Companies Regulations
1994. Regulation 23(2) allows half the amount of unpaid capital to be valued so long as a
quarter of the capital is paid up (with analogous provisions for a mutual). Regulation 23(4)
allows a mutual carrying on general business to value uncalled contributions, subject to the
restrictions in subparagraphs (a) and (b). In line with the Directive, the 1994 Regulations
prescribe that subordinated loan capital can count for solvency purposes if the obligation to
repay the loan is subordinated to the rights of policyholders and a section 68 Order is
obtained. The implicit assets mentioned by the 1994 Regulations are future profits,
zillmerising and hidden reserves. In line with the Directive’s requirements, the inclusion of
implicit items in the calculation of the margin of solvency is subject to the previous
authorisation of the competent authority, as prescribed by section 68 of the ICA. At the time
of the implementation of the Third Life Directive, the Secretary of State of the DTI issued a
Prudential Guidance providing further specifications on the use of implicit assets for solvency
purposes and on the use by the Secretary of State of the discretion granted by section 68 of
the Act in relation to this issue. The Guideline stated that while orders in respect of future
profits and zillmerising were readily available provided the relevant conditions were met,
Orders in respect of hidden reserves were only given as an exceptional measure.
Zillmerising and hidden reserves: zillmerisation is a process whereby an adjustment is made
in the actuarial valuation of long-term business to take account of the future recovery of the
costs of acquiring new business. The Zillmer adjustment allows for the initial expenses
incurred by a company when writing new business to be spread over the lifetime of the policy
in proportion to the premiums due. In this way the initial costs are offset against the future
income arising from that policy. Zillmer adjustments are applied only to policies where
regular premiums are payable.
The rules that prescribe the amount of the required minimum margin and the admissibility of
assets are contained in the Insurance Companies Regulations 1994. According to those rules,
different margins are required for different type of liabilities, the required minimum margin
being the aggregate of all the margins in question. In line with the Directive, Regulation 26 of
the 1994 Regulations prescribe that, in so far as they are not of an exceptional nature, hidden
reserves resulting from the underestimation of assets and overestimation of liabilities (other
than mathematical reserves), may be given full value for solvency purposes.
Link to the ELAS case
Article 25 imposes the obligation on the regulator to require from every assurance company
an adequate available solvency margin in respect of its ‘entire business’ at all times. The
concept is therefore explicitly reiterated for the third time. The solvency margin must be
represented by assets free of any foreseeable liabilities.
Was ELAS solvency margin ‘adequate at all times’? There are two issues to be analyzed: the
non-reserving of discretionary bonuses, and the use of future profits and Zillmerisation.
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1. Non-reserving of discretionary bonuses, link to Articles 10 and 18
As was explained in detail in the section on Articles 8, 10 and 18, ELAS did not reserve for
discretionary bonuses, thereby not computing these liabilities in its solvency margin. There is
one line of reasoning that assumes that, by being allowed to do this, ELAS managed by
artificial means to meet its solvency requirements, thereby hiding the truth from policyholders
and endangering its future financial viability. The argument continues by saying that this
would have meant that PRE were put at risk and that regulators took measures that were not
“appropriate and necessary to prevent or remedy any irregularities prejudicial to the
interests of the assured persons”, as required by Article 10. By not ensuring that the business
complied with UK law on PRE, it possibly failed to respect Article 10 (See also section II.2.
‘Further evidence on transposition’).
2. Future profits and Section 68 issue
The second key aspect of the solvency margin issue is the question of future profits,
Zillmerising and the powers of the Secretary of State.
At the time of the implementation of the 3LD, the EC legislation in force1 on future profits
prescribed that up to 50% of future profits could be used for meeting the undertaking’s
solvency requirements, prior to the authorization of the competent authority and subject to
certain conditions. The underlying rationale behind this was to anticipate the likelihood that
profits on investments would arise in future and be available to meet future liabilities. To
avoid risks, the estimation of future profits was to be carried out on a prudent basis. This
possibility was severely restricted with the adoption in 2002 of the Solvency I Directive (see
Article 1.4), which totally prohibits their use from 2009 onwards. The linkage with the ELAS
case becomes apparent following Baird's (WE 17)2 assertion that, on several occasions, ELAS
requested and successfully obtained authorisation from the regulator on numerous occasions
to use future profits, Zillmerising and subordinated loan capital to meet its solvency
requirements. According to this evidence, the company was thereby allowed to enhance the
external perception of its financial strength. Baird recommended reviewing the exercise of
discretion by the regulator relating to authorisations for using future profits to meet solvency
requirements.
Therefore, one of the lines of investigation being pursued is whether the discretion exercised
by the Secretary of State based on section 68 of the ICA 1982 played a prominent role in the
ELAS affair and whether that discretion itself is compatible with the 3LD. The Directive
prescribes that Member States must ensure that competent authorities have sufficient powers
and means to carry out their supervisory functions (see Article 10 3LD). The Directive, by
contrast, allows the competent authority to waive the application of rules only on a limited
number of occasions and subject to stringent conditions but it seems that nowhere in the
Directive is the competent authority of a Member State entrusted with such waiver powers as
those prescribed by section 68 of the ICA 1982. The investigation must ascertain whether
such powers entail the risk of being exercised in a lenient or inconsistent way that might have
1
Article 18(3)(A) Directive 79/267/EEC, the 1LD. For full text of the article, see section II.1.3, 'Relevant articles from other
directives'.
2 See Baird Report WE 17, para 7.2.2. at p. 228.
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been beneficial to some companies but not to others, thereby possibly undermining the
application of harmonised standards. Moreover, the issue is whether the ELAS scandal would
have been avoided, had those powers been constrained.
Section 68 of the ICA 1982
Let us look at section 68 more closely. Under section 68 of the Act, the Secretary of State
may, upon request or with the consent from an insurer and provided certain conditions are
met, waive the application of prudential rules to that particular company. Is this discretion
compatible with the 3LD?
Section 68 is entitled “Power to modify Part II in relation to particular companies”. The
wording of this section accords the Secretary of State generous powers not to apply to
particular companies (or apply with modifications) a substantive number of sections of the
ICA and regulations made under those sections. According to paragraph (4), the Secretary of
State may decide not to apply the following provisions:
“…sections 16 to 22, 23(1) and 25 to 36 of this Act, the provisions of regulations made for the
purposes of any of those sections and the provisions of any valuation regulations. […]”
This broad scope of provisions potentially affects the application of a vast number of
prudential regulations, including, amongst other things, regulations on regulatory returns,
technical provision requirements and solvency requirements to the Secretary of State’s
discretion. The Secretary of State must exercise his discretion not to apply the referred
provisions at the request or with the consent of the insurance company concerned and the
authorization must take the form of an order. Section 68 goes on to stipulate that the Secretary
of State may subject the authorization to specific conditions and may revoke it at any time. No
other formalities or standards qualify the exercise by the Secretary of State of the power to
decide not to apply relevant provisions to particular insurance companies.
The 3LD prescribes that Member States must ensure that competent authorities have
sufficient powers and means to carry out their supervisory functions but allows the competent
authority to waive the application of rules only on a limited number of occasions and subject
to stringent conditions1. The broad waiver powers prescribed by section 68 of the ICA 1982
are nowhere to be found in the Directive.
It must be noted that the previous comments do not apply to the UK regime currently in force.
The Financial and Services Market Act 2000, which has revoked, amongst other things, the
ICA 1982, also authorizes the regulator, now the FSA, to waive the application of prudential
regulations to particular companies. The difference between this and section 68 of the ICA
1982 is that current rules include stricter qualifications and much more detailed formalities for
the exercise by the FSA of the discretion granted by the Act.
1
Apart from article 25 3LD itself, see Article 21 3LD relating to the authorisation of other categories of assets as cover for
technical provisions, and Article 22 3LD relating to the authorisation to introduce exceptions to the rules on investment
diversification. Regarding Article 22, at UK level, according to section 68 of the ICA 1982, the Secretary of State has the
power to waive the application of valuation of assets regulations to particular companies, although the exercise of that power
is not qualified by the same standards prescribed by the Directive.
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These divergences show an apparent incompatibility between UK law and the requirements of
the 3LD, which raises serious concerns as to whether Article 25 of the 3LD was correctly
transposed into UK law. Failure to amend the ICA 1982 could be construed as tantamount to
defective transposition of the 3LD, given that the Act should have been modified in 1992 to
reflect the requirements of the 3LD.
Summary
To conclude as regards Article 25: the evidence quoted beforehand suggests that ELAS used
two accounting techniques to achieve solvency margins that satisfied the regulators’
requirements but which did not truly reflect the financial health of the company. According to
this evidence, it follows therefore that the regulator did not do its utmost to ensure that ELAS
had an adequate solvency margin in respect of its entire business at all times. The regulator:
a) took a very narrow view of solvency margins because it did not take into account accrued
terminal bonuses in its analysis. This allowed ELAS legally to avoid having to reserve for
discretionary bonuses as liabilities, which were therefore not computed in its solvency
margin. By being allowed to meet its solvency requirements artificially, ELAS hid the truth
from policyholders and endangered its future financial viability. Therefore, PRE were also put
at risk. It follows that UK regulators took measures that were not “appropriate and necessary
to prevent or remedy any irregularities prejudicial to the interests of the assured persons”
(Article 10) and did not ensure that ELAS complied with UK law, i.e., PRE;
b) authorized too frequently the use of future profits and Zillmerising by ELAS as part of the
implicit assets; this diminished the reliability and truthfulness of the solvency margin; it could
therefore be argued that Article 25 was not respected because the UK regulators did not fulfil
their obligation to require from ELAS an “adequate available solvency margin in respect of
its entire business at all times”.
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Article 28 - General good (Article 33 of CD)
Summary of objectives
The supervision of so-called "conduct of business" rules (i.e. contractual terms and practices
affecting the consumer taking out a policy) is another field of responsibility of regulators
appointed by Member States.
This article places on the Member State the commitment to prevent a policyholder from
concluding a contract with an assurance company in circumstances that would be contrary to
the “general good”. The provision does not define the meaning or scope of the “general
good”, leaving its definition to each Member State according to its domestic legislation.
Text of the article
Article 28
The Member State of the commitment shall not prevent a policy-holder from concluding a contract with an assurance
undertaking authorized under the conditions of Article 6 of Directive 79/267/EEC, as long as that does not conflict with legal
provisions protecting the general good in the Member State of the commitment.
Comments on UK transposition
As with any domestic legal system, the UK legal system includes an open-ended list of
provisions aimed at protecting the general good, which varies from time to time and may
affect the nature of the assurance products, the contract documents used, the marketing and
advertising of those products and, more generally, the conditions under which the insurance
business must be carried on in the Member State of the commitment. Of course, to be
compatible with Community law, such legislation must be aimed at protecting interests which
are not already safeguarded by the rules of the home Member State, it must be applied
without discrimination to all undertakings operating in that Member State and must be
objectively necessary and in proportion to the objective pursued. The UK advisory authorities
did not prepared a list of conditions described as constituting the general good. Instead, they
prepared a non-exhaustive list outlining the principal enactments which regulate insurance
business in the UK. In comparison with continental legal traditions, UK law tends to rely less
on restrictions of the contractual autonomy of the parties as a means to protect the general
good. Notwithstanding this approach, the UK does include a large number of provisions
aimed at protecting the general good. These are included in Part III of the ICA 1982 on
conduct of insurance business including provisions limiting the form and content of insurance
advertising and provisions regulating the type of information that insurance companies or
intermediaries must provide to policyholders before they enter into an insurance contract.
Link to the ELAS case
The issue here is whether the regulators in the UK, Ireland, Germany and other countries did
not fulfil their legal duty to uphold the general good by preventing ELAS from mis-selling its
policies. As the issue of home/host responsibilities is mainly one of implementation and
concerns the relation between the UK regulators and those from other Member States, it is
preferable to refer to Part III on Regulatory Action and Part IV on Redress issues. Obviously,
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in order to pursue this line of investigation, it is necessary first to prove whether mis-selling
did indeed take place, in other words, whether there were any circumstances contrary to the
general good under which ELAS policies were sold.
In terms of how conduct of business rules were managed in the UK, Mr. LAKE gives some
insight in H1 that the policyholder information required by the 3LD came under the control of
the conduct of business regulator, which was separate from the prudential regulator at the time
in the UK, and that this legal division of responsibilities between business and prudential was
prejudicial to ELAS policyholders. However, David STRACHAN from the FSA refutes this
claim in H4, saying that "the Third Life Directive has been implemented in a way that has
ensured clarity as to the respective responsibilities of the home and host regulators [...] This
avoids an otherwise confusing situation in which policyholders would be subject to different
conduct of business protections".
Fundamentally, policyholders have been making two types of allegations against ELAS:


mis-selling, by knowingly misrepresenting facts about the company's financial
position, especially in relation to the GAR risks;
omission (possibly based on deceit), by failing to draw attention to the GAR risks,
when that risk was a matter to be disclosed to existing and prospective policyholders.
There are several pieces of evidence that point to this, viz.:
-
WE 7 NASSIM
WE 51, 52
WE 53 SEYMOUR
WE 69 JOSEPHS
WE 72, WE 81 DEPPE
H5 LLOYD
H7 KWANTES
H8 BAIN
WE-Conf 2
Other allegations include:




Allegations of 'churning' policyholders' contracts
Claims of communication failure between UK regulators
Issues on communications between UK and foreign regulators
Claims of misleading advertising on the German and Irish market.
For in-depth detail, see Part III on Regulatory Action and Part IV on Redress issues.
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Article 31 - Information for policyholders (Article 36 of CD) and Annex II (Annex III of CD)
Summary of objectives
This article states that the information listed in Annex II of the Directive must be
communicated to the policyholder, with the possibility to require companies to give additional
information if it is necessary for a proper understanding by the policyholder of the essential
elements of the commitment.
Text of the article
Article 31
1. Before the assurance contract is concluded, at least the information listed in point A of Annex II shall be communicated to
the policy-holder.
2. The policy-holder shall be kept informed throughout the term of the contract of any change concerning the information
listed in point B of Annex II.
3. The Member State of the commitment may require assurance undertakings to furnish information in addition to that listed
in Annex II only if it is necessary for a proper understanding by the policy-holder of the essential elements of the
commitment.
4. The detailed rules for implementing this Article and Annex II shall be laid down by the Member State of the commitment.
ANNEX II
INFORMATION FOR POLICY-HOLDERS. The following information, which is to be communicated to the policy-holder
before the contract is concluded (A) or during the term of the contract (B), must be provided in a clear and accurate manner,
in writing, in an official language of the Member State of the commitment.
However, such information may be in another language if the policy-holder so requests and the law of the Member State so
permits or the policy-holder is free to choose the law applicable.
A. Before concluding the contract
Information about the assurance undertaking
Information about the commitment
(a) 1. The name of the undertaking and its legal form
(a) 2. The name of the Member State in which the head office and, where appropriate, the agency or branch concluding the
contract is situated
(a) 3. The address of the head office and, where appropriate, of the agency or branch concluding the contract
(a) 4. Definition of each benefit and each option
(a) 5. Term of the contract
(a) 6. Means of terminating the contract
(a) 7. Means of payment of premiums and duration of payments
(a) 8. Means of calculation and distribution of bonuses
(a) 9. Indication of surrender and paid-up values and the extent to which they are guaranteed
(a) 10. Information on the premiums for each benefit, both main benefits and supplementary benefits, where appropriate
(a) 11. For unit-linked policies, definition of the units to which the benefits are linked
(a) 12. Indication of the nature of the underlying assets for unit-linked policies
(a) 13. Arrangements for application of the cooling-off period
(a) 14. General information on the tax arrangements applicable to the type of policy
(a) 15. The arrangements for handling complaints concerning contracts by policy-holders, lives assured or beneficiaries
under contracts including, where appropriate, the existence of a complaints body, without prejudice to the right to take legal
proceedings
(a) 16. Law applicable to the contract where the parties do not have a free choice or, where the parties are free to choose the
law applicable, the law the assurer proposes to choose
B. During the term of the contract
In addition to the policy conditions, both general and special, the policy-holder must receive the following information
throughout the term of the contract.
Information about the assurance undertaking
Information about the commitment
(b) 1. Any change in the name of the undertaking, its legal form or the address of its head office and, where appropriate, of
the agency or branch which concluded the contract
(b) 2. All the information listed in points (a) (4) to (a) (12) of A in the event of a change in the policy conditions or
amendment of the law applicable to the contract
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(b) 3. Every year, information on the state of bonuses
Comments on UK transposition
The UK transposed Article 31 and Annex II into domestic legislation via the Insurance
Companies (Third Insurance Directives) Regulations 1994. Regulation 40 of these
regulations inserts section 72A and Schedule 2E – Information for policyholders of UK
insurers and EC companies - into the ICA 1982. Paragraphs 1 and 2 of the Schedule
prescribe the information to be disclosed before and during contracts of long-term insurance,
while paragraphs 3 and 4 prescribe the information to be disclosed before and during
contracts of general insurance. The DTI issued a Prudential Guidance Note that offers
guidance to insurers as to the methods by which they may best comply with the new disclosure
legislation. The preamble to this Guidance clearly states that it cannot be taken as an
authoritative statement and that insurers should refer to the Regulations and the relevant
Directives.
Pre-contractual disclosure requirements: the scope of application of pre-contractual
information requirements for long-term insurance contracts is defined by paragraph (1), sub
paragraphs (1) and (2) of the Schedule. According to these provisions, pre-contractual
disclosure requirements:
 Apply to contracts of direct long-term insurance effected by a head office or branch of an
insurance company or member of Lloyd’s situated in the UK or situated in a Member
State other than the UK where one or more of the other parties to the contract is
habitually resident in the UK
 Do not apply to contracts which constitute “investment business” , as defined by the FSA
Act 1986, affected by companies which are authorised persons within the meaning of that
Act. These contracts are governed by the SIB/LAUTRO disclosure rules.
Pre-contractual disclosure requirements for long-term insurance as set out by Schedule 2E
basically reiterate those included in Annex II with two relevant differences. Firstly, the
Schedule requires the disclosure of “any compensation or guarantee arrangements which will
be available if the insurer is unable to meet its liabilities under the contract”. This is an
additional requirement not listed by Annex II of the Directive. The Prudential Guidance Note
stipulates that, as a minimum, the assurance undertaking should provide on request detailed
information as to the compensation arrangements that will apply to the contract. However,
the Guidance notes that the best practice is to provide a brief description of the compensation
arrangements which will apply and that further information is available on request.
Secondly, in respect of the language to be used for disclosure, the Directive requires the
disclosure to be in a language of the Member State of the commitment (i.e. where the
policyholder is habitually resident) or, if the law of that Member State so permits and the
policyholder so requests, it may be provided in the language of another Member State.
However, Schedule 2E states that the information shall be furnished in English except when
the other party to the contract requests that the information be disclosed in an official
language of a Member State other than the UK. This means, for example, that if the
policyholder is habitually resident in a Member State other than the UK whose official
language is not English, the UK company can comply with the disclosure requirements by
furnishing that policyholder with information in English unless the policyholder requests that
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the information be furnished in his own language. Thus, the UK language rules do not oblige
the insurer to provide the information in a language other than English whereas the Directive
requires the disclosure to be in the language of the Member State of the commitment (i.e.
where the policyholder is habitually resident).
In addition, the Prudential Guidance Note further specifies the disclosure requirements
included in the schedule. For instance, with respect to the requirement to disclose the method
of calculation and distribution of bonuses, the Guidance Note specifies that the insurer should
state:
 how it distributes profits which are allocated for the payment of bonuses (for example, by
an increase in benefits or a decrease in premiums)
 whether increased benefits resulting from bonuses are only payable (subject to any
adjustments) even if the contract is terminated early by either party to the contract
 where the bonus acts to increase benefits, whether increases are likely to be made each
year or only when the policy monies become payable to the policyholder
 the basis upon which bonuses are allotted to policyholders (for example, sum assured,
premiums paid, value of existing bonuses)
 whether policies share equitably in the distribution of all the profits of the long-term fund
or only certain elements of these profits because, for example, certain assets are to be
hypothecated to the type of contract concerned so that the bonuses distributed to the
policyholder will be restricted to the profits earned on those assets.
The Prudential Guidance Note specifies that all the information must be disclosed in writing
before the contract is entered into. It goes on to specify that, as best practice, insurers should
disclose the information early in the selling process and whenever a product recommendation
is made or a proposal form completed by the policyholder.
Ongoing disclosure requirements: the scope of application of ongoing disclosure
requirements for long-term insurance contracts is defined by paragraph (2), sub paragraphs
(1) and (2) of the Schedule. According to these provisions, ongoing contractual disclosure
requirements apply to contracts of direct long-term insurance entered into by a head office or
branch of an insurance company or member of Lloyd’s situated in the UK or situated in a
Member State other than the UK where one or more of the other parties to the contract is
habitually resident in the UK. Unlike pre-contractual disclosure requirements, ongoing
disclosure requirements apply to all kinds of contracts for direct long-term insurance,
whether they have an investment component or not.
In line with Annex II of the Directive, ongoing disclosure requirements for long-term
insurance, as set out by Schedule 2E, refer to both disclosure of information on contract
variations and on the state of bonuses. The extent, form and timing of the ongoing disclosure
requirements are further specified by the Prudential Guidance Note, which refers to the
SIB/LAUTRO rules. The SIB/LAUTRO rules on disclosure of information relating to contract
variations and on the state of bonuses is far more detailed than the succinct reference made
by the Directive. SIB/LAUTRO rules stipulate that bonus notices must be issued at least once
in every calendar year and that they should take one of the following forms:
 a client-specific notice that indicates the amount of the bonus allotted to that policyholder,
or
 a client-specific notice which indicates the total value of the investment, including the
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
value of any bonus allotted, and the rate of bonus over the period of time to which the
bonus notice relates, or
a non client-specific notice that provides sufficient information to enable policyholders to
calculate the amount of bonus allotted to them and indicates the method for the
calculation. Such a notice could take the form of a table of values for the bonus for given
sums assured and years of commencement of the contract or indicate the amount of the
bonus as a proportion of the sum assured.
Link to the ELAS case
This article is inseparably linked to Article 28.
The issue in this instance is whether ELAS properly informed policyholders, in addition to the
initial pre-contractual information, of changes to their policy conditions, for example
concerning updates on the state of their bonuses. To pursue this line of investigation, it is
necessary to verify if ELAS did indeed adequately fulfil these obligations and, if it did not,
what action, if any, was taken by the conduct of business regulator in each case (UK, Ireland,
Germany, etc.).
The Directive itself requires only that the policyholder must be informed, inter alia, of “the
definition of each benefit and each option” and “the means of calculation and distribution of
bonuses”. These requirements are not sufficiently specific. There is powerful evidence to
suggest that, from 1998 onwards, ELAS did not adequately disclose the risk posed by
guaranteed annuity rates to prospective policyholders with non-guaranteed rates. It is difficult
to make the case that this was a breach of the Directive but easy to make the case that there is
a need to enhance disclosure requirements for the benefit of policyholders.
For in-depth detail, see Part III on Regulatory Action and Part IV on Redress issues.
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II.1.2. Other articles of the 3LD
Article 9 - Supervision of branches established in another Member State (Articles 16 of 1LD
and 11 of CD)
Summary of objectives
This article entitles the home Member State to carry on on-the-spot supervision of branches
established in another Member State and previous notification to the competent authorities of
the host Member State.
Text of the article
Article 9
Article 16
of Directive 79/267/EEC shall be replaced by the following:
'Article 16
The Member State of the branch shall provide that, where an assurance undertaking authorized in another Member State
carries on business through a branch, the competent authorities of the home Member State may, after having first informed
the competent authorities of the Member State of the branch, carry out themselves, or through the intermediary of persons
they appoint for that purpose, on-the-spot verification of the information necessary to ensure the financial supervision of the
undertaking. The authorities of the Member State of the branch may participate in that verification'.
Comments on UK transposition
This provision has been transposed into UK legislation by Regulation 45 of the Insurance
Companies (Third Insurance Directives) Regulations 1994, which inserts Schedule 2F to the
ICA 1982. Paragraphs 13 and 14 of Schedule 2F modify the power of the Secretary of State to
obtain information from insurance companies conferred by section 44 of the ICA 1982, when
that power is exercised in respect of an EC company. Section 44 of the Act confers the
Secretary of State two types of power: subsection (1) refers to the power to require a company
to furnish the Secretary of State with information about specified matters; subsections (2)(a),
(2)(b) and (4)(a) refer to the power to require a company to produce books or papers as may
be specified. With respect to the power to require information about specified matters,
paragraph 13(1) provides that the Secretary of State may exercise this power in respect of an
EC company either if the supervisory authority of the home Member State has requested him
to do so or if the Secretary of State considers that the information to be acquired is necessary
to enable him to perform his supervisory functions. In the latter circumstance, the Secretary
of State enjoys some discretion in using this power, which is not subjected to a request from
the competent authority of the home Member State. With respect to the power to require a
company to produce books or papers, in line with the Directive, paragraph 13(2) provides
that the Secretary of State shall not exercise this power in respect of an EC company unless
the supervisory authority in the company’s home State has requested him – in writing – to
obtain information from that company. Thus, the UK implementing measure is more
restrictive than the Directive in that it requires the home Member State not only to notify the
host Member State authority but also to submit this notification in writing.
Finally, in accordance with the Directive, paragraph 14(2) provides that an officer or agent
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of the Secretary of State may accompany the person authorised by the competent authorities
of the home Member State while he is exercising the power to obtain information.
Link to the ELAS case
According to the evidence analyzed so far, no on-the-spot visits were performed by UK
supervisors in other Member State regarding ELAS, nor have any previous notifications to the
host Member State been found on this matter.
Article 12 - Difficulties to comply with financial guarantees (Articles 24 of 1LD and 37 of
CD)
Summary of objectives
This article lists the actions to be taken by the competent authority of the home Member State
to protect policyholders’ rights when assurance companies are facing difficulties in complying
with their financial guarantees. It specifies the circumstances under which such actions may
be taken, the formalities that are to be observed and the circumstances under which the home
Member State may prohibit the company's free disposal of assets.
Text of the article
Article 12
1. Article 24 of Directive 79/267/EEC shall be replaced by the following:
'Article 24
1. If an undertaking does not comply with Article 17, the competent authority of its home Member State may prohibit the free
disposal of its assets after having communicated its intention to the competent authorities of the Member States of
commitment.
2. For the purposes of restoring the financial situation of an undertaking the solvency margin of which has fallen below the
minimum required under Article 19, the competent authority of the home Member State shall require that a plan for the
restoration of a sound financial position be submitted for its approval.
In exceptional circumstances, if the competent authority is of the opinion that the financial situation of the undertaking will
further deteriorate, it may also restrict or prohibit the free disposal of the undertaking's assets. It shall inform the authorities
of other Member States within the territories of which the undertaking carries on business of any measures it has taken and
the latter shall, at the request of the former, take the same measures.
3. If the solvency margin falls below the guarantee fund as defined in Article 20, the competent authority of the home
Member State shall require the undertaking to submit a short-term finance scheme for its approval.
It may also restrict or prohibit the free disposal of the undertaking's assets. It shall inform the authorities of other Member
States within the territories of which the undertaking carries on business accordingly and the latter shall, at the request of
the former, take the same measures.
4. The competent authorities may further take all measures necessary to safeguard the interests of the assured persons in the
cases provided for in paragraphs 1, 2 and 3.
5. Each Member State shall take the measures necessary to be able in accordance with its national law to prohibit the free
disposal of assets located within its territory at the request, in the cases provided for in paragraphs 1, 2 and 3, of the
undertaking's home Member State, which shall designate the assets to be covered by such measures.'
Comments on UK transposition
Failure to establish sufficient technical provisions: the ICA 1982 grants the Secretary of
State the power to restrict a company’s freedom to dispose of its assets, if it appears to him
that the company has failed to cover its liabilities by assets of appropriate safety, yield and
marketability. Unlike the Directive, domestic legislation does not require the Secretary of
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State to communicate its decision to restrict a company’s freedom to dispose of its assets to
the competent authorities of other Member States.
Failure to maintain the required solvency margin: at UK level, section 32(4) of the ICA 1982,
as amended, prescribes that when an insurance company fails to maintain the required
margin of solvency it must, at the request of the Secretary of State, submit to him a plan for
the restoration of a sound financial position. If the Secretary of State considers the plan
inadequate, the company must propose modifications to it. Once the Secretary of State
accepts the plan, the company must give effect to it. The Directive clearly prescribes that,
should this irregularity occur, the competent authority of the home Member State must
request the restoration plan. By contrast, the domestic provision stipulates that the company
must “… at the request of the Secretary of State…” submit a restoration plan. The domestic
provision can thus be construed as conferring a prerogative to the Secretary of State to
request the submission of the restoration plan, rather than imposing an obligation on him to
request it.
Failure to prevent the solvency margin from falling below the guarantee fund: at UK level,
section 33 of the ICA, as amended, prescribes that when the margin of solvency of an
insurance company falls below the guarantee fund (one-third of a required margin of
solvency), the company must, at the request of the Secretary of State, submit to him a shortterm financial scheme. If the Secretary of State considers the scheme inadequate, the company
must propose modifications to it. Once the Secretary of State accepts the scheme, the
company must give effect to it. The Act places the emphasis on the insurance company’s
obligation to submit the short-term financial scheme but does not impose an obligation on the
Secretary of State to request it.
Duties of the Member States where the assets are located: UK legislation does envisage the
possibility that the Secretary of State may restrict an EC company’s freedom to dispose of its
assets at the request of the supervisory authority of the company’s home State.
The power of the competent authority to prohibit the free disposal of assets: under UK
legislation, the ICA 1982 confers on the Secretary of State the power to restrict a company’s
freedom to dispose of its assets. Sections 37, 40(A) and 45 of the ICA 1982 govern the
grounds for the exercise of this power and the formalities to be observed. Section 37(3) of the
Act lays down the following grounds on the basis of which the Secretary of State may restrict
a company’s freedom to dispose of its assets: where the Secretary of State has given (and not
revoked) a direction withdrawing (section 11) or suspending (section 12(A)) a company’s
authorisation to carry on insurance business; on the grounds that it appears to the Secretary
of State that the company has failed to satisfy its obligation to maintain a minimum solvency
margin (section 32) or has failed to comply with the obligations relating to the localisation
and currency of the assets (section 35); on the grounds that it appears to the Secretary of
State that the company’s liabilities have not been determined in accordance with valuation
regulations or generally accepted accounting methods; on the grounds that it appears to the
Secretary of State that the company has failed to cover its liabilities by assets of appropriate
safety, yield and marketability (section 35A).
Section 45 of the Act, as amended by the Insurance Companies (Third Insurance Directives)
Regulations 1994, confers on the Secretary of State a residual power “to take such action as
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appears to him to be appropriate for the purpose of protecting policyholders or potential
policyholders of the company against the risk that the company may be unable to meet its
liabilities or, in the case of long-term business, to fulfil the reasonable expectations of
policyholders or potential policyholders”. Such residual power, which can only be exercised
when the Secretary of State considers that those purposes cannot be appropriately achieved
by the exercise of the powers expressly mentioned by the Act in sections 38 to 44, includes the
Secretary of State’s power to restrict the company’s freedom to dispose of its assets.
Paragraph 2 of section 45 basically reiterates the grounds enumerated by section 37(3) on
the basis of which the Secretary of State may restrict the company’s freedom to dispose of its
assets.
With respect to the formalities to be observed, the Act prescribes that when exercising any of
the powers conferred by the Act, the Secretary of State must “state the ground on which he is
exercising it”. To restrict a company’s freedom to dispose of its assets, the Secretary of State
must apply to the Court for an injunction. Section 40A prescribes the conditions under which
the Court may, on the application of the Secretary of State, grant the requested injunction.
Such restriction is limited to the value of the company’s “EC liabilities”. It stems from the
provisions cited above that the power of the Secretary of State to freeze a company’s assets
under UK legislation is broader than that conferred by the Directive to Member State’s
competent authorities. In other words, the Secretary of State can restrict a company’s
freedom to dispose of its assets in more circumstances than those exceptionally envisaged by
the Directive. The exercise by the Secretary of State of his power to freeze a company’s assets
is subject, however, to the observance of special formalities - including the need to apply
before a court for an injunction – which are not prescribed by the Directive.
Link to the ELAS case
The applicability of Article 12 to the Equitable Life crisis is unclear. The UK regulator
claimed that this article was not relevant and justified its lack of intervention in the 1990’s by
stating that, "Equitable has always been solvent and in its regulatory returns it has always
reported that it is currently meeting its regulatory solvency requirements" (David
STRACHAN, as stated in H4). Given that the solvency margin was always formally respected
by ELAS, paragraph 3 of the article was never activated. For further information on this point,
see the section on Article 25 on the Solvency margin and Part III on Regulatory Action.
Divergences between the 3LD and implementing provisions: UK legislation confers to the
Secretary of State the power, in line with the 3LD, to intervene in the case of assurance
undertakings facing financial difficulties. However, contrary to the Directive, the Secretary of
State may request the submission of a restoration plan or a short finance scheme. In addition,
the Secretary of State may restrict the company’s freedom to dispose of its assets in more
circumstances than those envisaged by the 3LD.
Article 13 - Withdrawal of authorisation (Articles 26 of 1LD and 39 of CD)
Summary of objectives
This article harmonises the grounds for withdrawal of authorisation in respect of an assurance
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company by the competent authority of the home Member State. In addition, this provision
places some obligations on the home Member State and on the host Member State in the event
of withdrawal. It also deals with some procedural formalities that must be observed.
Text of the article
Article 13
Article 26
of Directive 79/267/EEC shall be replaced by the following:
'Article 26
1. Authorization granted to an assurance undertaking by the competent authority of its home Member State may be
withdrawn by that authority if that undertaking:
(a) does not make use of the authorization within 12 months, expressly renounces it or ceases to carry on business for more
than six months, unless the Member State concerned has made provision for authorization to lapse in such cases;
(b) no longer fulfils the conditions for admission;
(c) has been unable, within the time allowed, to take the measures specified in the restoration plan or finance scheme
referred to in Article 24;
(d) fails seriously in its obligations under the regulations to which it is subject.
In the event of the withdrawal or lapse of the authorization, the competent authority of the home Member State shall notify
the competent authorities of the other Member States accordingly and they shall take appropriate measures to prevent the
undertaking from commencing new operations within their territories, under either the freedom of establishment or the
freedom to provide services. The home Member State's competent authority shall, in conjunction with those authorities, take
all necessary measures to safeguard the interests of the assured persons and shall restrict, in particular, the free disposal of
the assets of the undertaking in accordance with Article 24 (1), (2), second subparagraph, or (3), second subparagraph.
2. Any decision to withdraw an authorization shall be supported by precise reasons and notified to the undertaking in
question.
Comments on UK transposition
Several grounds for withdrawing an authorisation already existed in UK legislation before
the adoption of the 3LD (e.g. the undertaking does not make use of the authorisation within
twelve months; the undertaking expressly renounces; failure to fulfil the conditions for
admission). In cases where the undertaking ceases to carry on business for more than six
months, the UK provision allows the Secretary of State to withdraw the authorisation if the
undertaking “ceases to carry on insurance business or insurance business of any class” but
does not qualify the Secretary of State’s right of withdrawal to the observance of a minimum
period of six months. Regarding failure to adopt the measures prescribed by the restoration
plan, UK legislation confers on the Secretary of State ample margin to withdraw an
authorisation if it appears to him that a company has failed to satisfy any kind of obligation to
which it is subject by virtue of the ICA Act or the Financial Services Act 1986.
“Serious” failure to comply with the obligations it is subject to: this qualification is not
included in UK legislation and the Secretary of State may withdraw an undertaking’s
authorisation for failure to comply with the obligations it is subject to, even if that failure is
not “serious”. He may withdraw the authorisation if it appears to him that any of the criteria
of sound and prudent management is or has not been fulfilled, or may not be or may not have
been fulfilled, in respect of the company.
UK obligations as home Member State in the event of withdrawal of authorisation of a UK
company operating in Member States other than the UK: the Directive prescribes that the
home Member State must take all necessary measures to safeguard the interests of assured
persons and shall restrict, in particular, the free disposal of assets of the assurance
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undertaking. Under UK legislation, the Secretary of State has the power to restrict the
company’s freedom to dispose of its assets not only when he has given (and not revoked) a
direction withdrawing a company’s authorisation to carry on business but also when he has
given a direction suspending such authorisation.
Link to the ELAS case
This provision would have required the UK regulator to withdraw authorisation granted to
ELAS inter alia if the latter had failed "seriously in its obligations under the regulations to
which it is subject". Several pieces of evidence (WE 2, 4, 6-8, 14-17, 22-23, 31, 33-34, 36, 44,
51-54, 69, 72, 79 and 84) claim that Equitable did indeed fail seriously in this respect.
However, the regulator never considered that the conditions for activating this article were
met. For further details, see section II.2. ‘Further evidence on transposition’.
Divergences between the 3LD and implementing provisions: the Directive provides that the
home Member State must notify the competent authorities of the other Member States. The
national implementing measure does not stipulate that the Secretary of State must inform the
competent authority of other Member States.
Article 15 - Professional secrecy (Article 16 of CD)
Summary of objectives
This article establishes a duty of professional secrecy aimed at protecting the confidentiality
of information and then introduces a number of exceptions to that obligation. It describes the
purposes for which competent authorities can use confidential information and lists the
circumstances and conditions under which the exchange of confidential information between
the competent authorities of Member States or with other bodies such as other supervisory
authorities, independent actuaries, central banks and other departments can take place.
Text of the article
Article 15
1. The Member States shall provide that all persons working or who have worked for the competent authorities, as well as
auditors or experts acting on behalf of the competent authorities, shall be bound by the obligation of professional secrecy.
This means that no confidential information which they may receive in the course of their duties may be divulged to any
person or authority whatsoever, except in summary or aggregate form, such that individual assurance undertakings cannot
be identified, without prejudice to cases covered by criminal law.
Nevertheless, where an assurance undertaking has been declared bankrupt or is being compulsorily wound up, confidential
information which does not concern third parties involved in attempts to rescue that undertaking may be divulged in civil or
commercial proceedings.
2. Paragraph 1 shall not prevent the competent authorities of the different Member States from exchanging information in
accordance with the directives applicable to assurance undertakings. That information shall be subject to the conditions of
professional secrecy indicated in paragraph 1.
3. Member States may conclude cooperation agreements, providing for exchanges of information, with the competent
authorities of third countries only if the information disclosed is subject to guarantees of professional secrecy at least
equivalent to those referred to in this Article.
4. Competent authorities receiving confidential information under paragraphs 1 or 2 may use it only in the course of their
duties:
- to check that the conditions governing the taking-up of the business of assurance are met and to facilitate monitoring of the
conduct of such business, especially with regard to the monitoring of technical provisions, solvency margins, administrative
and accounting procedures and internal control mechanisms, or
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- to impose sanctions, or
- in administrative appeals against decisions of the competent authority, or
- in court proceedings initiated pursuant to Article 50 or under special provisions provided for in the directives adopted in
the field of assurance undertakings.
5. Paragraphs 1 and 4 shall not preclude the exchange of information within a Member State, where there are two or more
competent authorities in the same Member State, or, between Member States, between competent authorities and:
- authorities responsible for the official supervision of credit institutions and other financial organizations and the authorities
responsible for the supervision of financial markets,
- bodies involved in the liquidation and bankruptcy of assurance undertakings and in other similar procedures, and
- persons responsible for carrying out statutory audits of the accounts of assurance undertakings and other financial
institutions,
in the discharge of their supervisory functions, and the disclosure, to bodies which administer (compulsory) winding-up
proceedings or guarantee funds, of information necessary to the performance of their duties. The information received by
these authorities, bodies and persons shall be subject to the obligation of professional secrecy laid down in paragraph 1.
6. In addition, notwithstanding paragraphs 1 and 4, Member States may, under provisions laid down by law, authorize the
disclosure of certain information to other departments of their central government administrations responsible for legislation
on the supervision of credit institutions, financial institutions, investment services and assurance undertakings and to
inspectors acting on behalf of those departments.
However, such disclosures may be made only where necessary for reasons of prudential control.
However, Member States shall provide that information received under paragraphs 2 and 5 and that obtained by means of
the on-the-spot verification referred to in Article 16 of Directive 79/267/EEC may never be disclosed in the cases referred to
in this paragraph except with the express consent of the competent authorities which disclosed the information or of the
competent authorities of the Member State in which on-the-spot verification was carried out.
Comments on UK transposition
Under UK legislation, restrictions on disclosure of information are governed by section 41A
and schedule 2B of the ICA 1982, inserted by Regulation 26 of the Insurance Companies
(Third Insurance Directives) Regulations 1994 implementing the Third Life Directive, as
amended by Regulation 20 of the Financial Institutions (Prudential Supervision) Regulations
1996, implementing Directive 95/96/EC.
The professional secrecy obligation: at domestic level, the professional secrecy obligation is
governed by paragraph 1 of Schedule 2B of the Act. In terms of its scope of application, the
obligation binds “any person” who discloses “restricted information” in contravention to
paragraph 1. “Restricted information” refers to information obtained by the Secretary of
State for the purposes of, or in the discharge of, functions under the Act or any rules or
regulations made under the Act, which relates to the business or other affairs of “relevant
persons”, namely, “any UK, EC or non-EC company and any controller, manager, chief
executive, general representative, agent or employee of such a company”. Paragraph 5
extends the obligation not to disclose confidential information to information which has been
supplied to the Secretary of State for the purposes of its functions under the Act by a
supervisory authority in a Member State other than the UK or has been obtained for those
purposes by the Secretary of State or by a person acting on his behalf, in another Member
State. It can be said that the scope of application of the obligation prescribed by the national
provision is even broader than that prescribed by the Directive because it binds “any person”
(not only persons working, or who have worked, for the competent authority). In addition, the
national provision expressly specifies that “restricted information” covers not only
information relating to the assurance undertakings themselves but also to information
relating to executives and employees of those companies. Finally, the national provision goes
further than the Directive by prescribing a penalty for those who breach the obligation not to
disclose information in contravention to the conditions laid down by paragraph 1.
Exchange of information between the competent authority of a Member State and other
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competent authorities or relevant bodies: at UK level, paragraph 3 of Schedule 2B refers to
authorisations for the Secretary of State to disclose information aimed at facilitating
discharge of functions by other regulatory authorities and paragraph 4 refers to other
authorised disclosures aimed at facilitating discharge of functions by other relevant bodies.
In line with the Directive, all authorised disclosures are to supervisory authorities, regulatory
authorities or other relevant bodies expressly identified by the national legislation and in all
cases the purpose of the authorisation is to allow those bodies to discharge their functions.
Furthermore, national rules expressly prescribe that disclosed information shall not be used
otherwise than for the expressly mentioned purposes and imposes criminal penalties for
persons who use the information in contravention of the rules.
Link to the ELAS case
The article is relevant with regards to the exchanges (or lack thereof) of correspondence
between the UK regulator and the Irish and German regulators. For further information on this
point, see Part III on Regulatory Action and Part IV on Redress. WE-Conf 9 contains a list of
confidential correspondence between regulators on the ELAS case.
With regard to the duties of auditors, see the reference to Article 17 of the CD. Questions
have been raised as to the actions of ELAS' auditors throughout the affair. However, the
mandate of the EQUI committee does not explicitly cover this area. A case was brought
against ELAS' previous auditors (Ernst&Young) by the new management in 2001 but was
ultimately dismissed.
Divergences between the 3LD and implementing provisions: the UK provision establishes that
information is not “restricted information” if “it is information in the form of a summary or is
"information so framed as not to enable information relating to any particular person to be
ascertained from it". As it stands, the UK provision contradicts the Directive because it allows
a further exception to the obligation of professional secrecy, namely, that the dissemination of
information about the company “in the form of a summary” is sufficient. In contrast, what the
Directive allows is the dissemination of information “in the form of a summary [or aggregate
form] such that individual assurance undertakings cannot be identified.”
Article 19 - Premiums for new business (Article 21 of CD)
Summary of objectives
This article provides for some general guidelines on the adequacy of the premiums for new
business, viz.: they must be sufficient on reasonable actuarial terms to enable the company to
meet its commitments and to establish adequate technical provisions. For this purpose, the
only inputs to be taken into account in order to respect the solvency margin are those coming
from premiums and other systematic and permanent income sources.
Text of the article
Article 19
Premiums for new business shall be sufficient, on reasonable actuarial assumptions, to enable assurance undertakings to
meet all their commitments and, in particular, to establish adequate technical provisions.
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For this purpose, all aspects of the financial situation of an assurance undertaking may be taken into account, without the
input from resources other than premiums and income earned thereon being systematic and permanent in such a way that it
may jeopardize the undertaking's solvency in the long term.
Comments on UK transposition
These standards were transposed into UK legislation by the Insurance Companies (Third
Insurance Directives) Regulations 1994. Regulation 18 of these regulations inserted section
35B into the ICA 1982, which rightly transposes the Directive’s provision, including all its
guidelines on the adequacy of the premiums. UK legislation goes beyond the Directive and
requires that the appointed actuary of a company carrying long-term business certify that
premiums for contracts entered into during the financial year and the income earned thereon
comply with these standards.
Link to the ELAS case
There is no clear link to the case. For further information on this point, see Part III on
Regulatory Action.
Divergences between the 3LD and implementing provisions: none found.
Article 20 - Assets covering matching provisions (Article 22 of CD)
Summary of objectives
This article provides for some general guidelines on the investment standards the assets
covering technical provisions must aim to meet: they must secure the safety, yield and
marketability of its investments and must be diversified and adequately spread.
Text of the article
Article 20
The assets covering the technical provisions shall take account of the type of business carried on by an undertaking in such a
way as to secure the safety, yield and marketability of its investments, which the undertaking shall ensure are diversified and
adequately spread.
Comments on UK transposition
These standards were transposed into UK legislation by the Insurance Companies (Third
Insurance Directives) Regulations 1994.
Link to the ELAS case
There is no clear link to the case. It would be necessary to review the investment strategy of
ELAS over a number of years and even decades to ascertain whether the assets covering the
technical provisions were secure and diversified. In any case, the main contentious point in
the case is not so much the investment standard of the assets covering technical provisions but
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rather the possible lack of sufficient reserving. For further information on this point, see
Part III on Regulatory Action.
Divergences between the 3LD and implementing provisions: none found.
Article 22 - Rules for investment diversification
Summary of objectives
This article refers to the rules and principles that Member States must observe when
regulating on assurance undertakings’ investments. It covers, on the one hand, investment
limits on specific assets and, on the other hand, general investment principles for admissible
assets.
Text of the article
Article 22
1. As regards the assets covering technical provisions, the home Member State shall require every assurance undertaking to
invest no more than:
(a) 10 % of its total gross technical provisions in any one piece of land or building, or a number of pieces of land or
buildings close enough to each other to be considered effectively as one investment;
(b) 5 % of its total gross technical provisions in shares and other negotiable securities treated as shares, bonds, debt
securities and other money- and capital-market instruments from the same undertaking, or in loans granted to the same
borrower, taken together, the loans being loans other than those granted to a State, regional or local authority or to an
international organization of which one or more Member States are members. This limit may be raised to 10 % if an
undertaking invests not more than 40 % of its gross technical provisions in the loans or securities of issuing bodies and
borrowers in each of which it invests more than 5 % of its assets;
(c) 5 % of its total gross technical provisions in unsecured loans, including 1 % for any single unsecured loan, other than
loans granted to credit institutions, assurance undertakings - in so far as Article 8 of Directive 79/267/EEC allows it - and
investment undertakings established in a Member State. The limits may be raised to 8 and 2 % respectively by a decision
taken on a case-by-case basis by the competent authority of the home Member State;
(d) 3 % of its total gross technical provisions in the form of cash in hand;
(e) 10 % of its total gross technical provisions in shares, other securities treated as shares and debt securities which are not
dealt in on a regulated market.
2. The absence of a limit in paragraph 1 on investment in any particular category does not imply that assets in that category
should be accepted as cover for technical provisions without limit. The home Member State shall lay down more detailed
rules fixing the conditions for the use of acceptable assets. In particular it shall ensure, in the determination and the
application of those rules, that the following principles are complied with:
(i) assets covering technical provisions must be diversified and spread in such a way as to ensure that there is no excessive
reliance on any particular category of asset, investment market or investment;
(ii) investment in particular types of asset which show high levels of risk, whether because of the nature of the asset or the
quality of the issuer, must be restricted to prudent levels;
(iii) limitations on particular categories of asset must take account of the treatment of reassurance in the calculation of
technical provisions;
(iv) where the assets held include an investment in a subsidiary undertaking which manages all or part of the assurance
undertaking's investments on its behalf, the home Member State must, when applying the rules and principles laid down in
this
Article, take into account the underlying assets held by the subsidiary undertaking; the home Member State may treat the
assets of other subsidiaries in the same way;
(v) the percentage of assets covering technical provisions which are the subject of non-liquid investments must be kept to a
prudent level;
(vi) where the assets held include loans to or debt securities issued by certain credit institutions, the home Member State
may, when applying the rules and principles contained in this Article, take into account the underlying assets held by such
credit institutions. This treatment may be applied only where the credit institution has its head office in a Member State, is
entirely owned by that Member State and/or that State's local authorities and its business, according to its memorandum and
articles of association, consists of extending, through its intermediaries, loans to, or guaranteed by, States or local
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authorities or of loans to bodies closely linked to the State or to local authorities.
3. In the context of the detailed rules laying down the conditions for the use of acceptable assets, the Member State shall give
more limitative treatment to:
- any loan unaccompanied by a bank guarantee, a guarantee issued by an assurance undertaking, a mortgage or any other
form of security, as compared with loans accompanied by such collateral,
- UCITS not coordinated within the meaning of Directive 85/611/EEC (¹) and other investment funds, as compared with
UCITS coordinated within the meaning of that Directive,
- securities which are not dealt in on a regulated market, as compared with those which are,
- bonds, debt securities and other money- and capital-market instruments not issued by States, local or regional authorities
or undertakings belonging to Zone A as defined in Directive 89/647/EEC (²), or the issuers of which are international
organizations not numbering at least one Community Member State among their members, as compared with the same
financial instruments issued by such bodies.
4. Member States may raise the limit laid down in paragraph 1 (b) to 40 % in the case of certain debt (¹) Council Directive
85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to
undertakings for collective investment in transferable securities (UCITS) (OJ No L 375, 31. 12. 1985, p. 3). Directive as
amended by Directive 88/220/EEC (OJ No L 100, 19. 4. 1988, p. 31).
(²) Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions (OJ No L 386, 30. 12.
1989, p. 14).
securities when these are issued by a credit institution which has its head office in a Member State and is subject by law to
special official supervision designed to protect the holders of those debt securities. In particular, sums deriving from the
issue of such debt securities must be invested in accordance with the law in assets which, during the whole period of validity
of the debt securities, are capable of covering claims attaching to debt securities and which, in the event of failure of the
issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.
5. Member States shall not require assurance undertakings to invest in particular categories of assets.
6. Notwithstanding paragraph 1, in exceptional circumstances and at the assurance undertaking's request, the home Member
State may, temporarily and under a properly reasoned decision, allow exceptions to the rules laid down in paragraph 1 (a) to
(e), subject to Article 20.
Comments on UK transposition
UK legislation does not impose direct restrictions on a company’s choice of investments.
However, valuation of assets regulations exert a significant indirect influence over a
company’s investment policies. Either by providing that certain type of assets are
inadmissible or by limiting the value of those assets that can be taken into account for
regulatory purposes, valuation of assets regulations encourage companies to hold a prudent
spread of relatively low-risk assets, which are in line with the Directive’s prescriptions for
investment diversification.
Investment limits on specific assets: the Directive prescribes some investment limits on
certain type of assets expressed in terms of percentages of total gross technical provisions.
For instance, no more than 10% can be invested in any piece of land, no more than 3% in the
form of cash in hand, and so forth. Similarly, UK legislation includes rules that impose a limit
on the maximum admissible value of each type of asset that can be taken into account for
regulatory purposes.
Regulation 57 provides that, where the aggregate exposure of the company to assets of any
one description exceeds the “maximum admissible value” for assets of that description,
“there shall be left out of account assets equal in value to the excess”. Regulation 57 goes on
to define “maximum admissible value” for a company carrying on long-term business as an
amount equal to the percentage of the “long-term business amount” specified in Schedule 12,
Part I.
Unlike the Directive, UK legislation imposes the percentage restrictions by reference not to
technical provisions but with regard to “long-term business amount”. The DTI argued that it
was not necessary to introduce any changes because UK rules are, in the majority of cases,
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more prudent than the rules set out in the Directive. 1
For instance, the maximum admissible value for cash is 3% of the long-term business amount.
The UK rule does not expressly prescribe that assurance undertakings cannot invest more
than 3% on cash; what the UK rule does prescribe is that, if the company does invest more
than 3% on cash, the excess will not be counted for the valuation of that particular asset.
In some cases the national aggregate exposure limits are more prudent than the Directive’s
investment limits. For instance, the Directive limits investments in any piece of land to up to
10% of the company’s total gross technical provisions, while the national measure limits the
company’s aggregate exposure to a piece of land to up to 5% of the undertaking’s long-term
business amount. In other cases the limits are the same, for instance for unlisted shares (10%)
and cash (3%). UK regulation goes on to prescribe some limits not prescribed by the
Directive, for example, 5% on holdings in authorised unit trust schemes, 5% on computer
equipment and 2.5% on office machinery.
Link to the ELAS case
This article is linked to the case within the terms of paragraph 6, which introduces an escape
clause to the requirements contained in the rest of the article. According to this provision, "in
exceptional circumstances” and “at an assurance undertaking’s request”, the home Member
State may “temporarily” and “under a properly reasoned decision" allow exceptions to the
rules laid down in paragraph 1.
This needs to be seen in the context of Article 25 on the Solvency margin and Article 21 on
assets allowed to cover technical provisions. The issue at hand is whether UK legislation
gives the regulator (the Secretary of State) broader powers than those prescribed by the
Directive to waive regulations on prudential supervision. At UK level, under section 68 of the
1982 ICA, the Secretary of State may, upon request or with the consent from an insurer,
waive the application of prudential supervision rules. The exercise of this power is not
constrained by the standards mentioned in the Directive (i.e. “exceptional circumstances”,
“temporarily”, “under properly reasoned decision”). The provision stipulates that the
Secretary of State’s decision “may be subject to conditions”, clearly attributing to the
regulator discretion to decide whether to impose those conditions or not. These seem to be
broader powers than those prescribed by the Directive.
Such powers entail the risk of being exercised in a very lenient way, undermining the
application of harmonized standards. This raises some concerns as to the compatibility of
section 68 of the ICA 1982 with the 3LD. See further arguments in the section covering
Article 25 on the Solvency margin.
Article 29 - Conditions of assurance and premiums (Article 34 of CD)
Summary of objectives
1
See comments on article 21.1 in WE 20, Wilde Sapte Report, 'Section II.2.2' of this Part.
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The aim of this article is to encourage Member States to adopt less trade restrictive practices.
It prevents Member States requiring the prior approval of policy conditions, scales of
premiums, technical bases used for calculating scales of premiums and technical provisions
and other printed documents the insurer may use in its dealing with policyholders.
Text of the article
Article 29
Member States shall not adopt provisions requiring the prior approval or systematic notification of general and special
policy conditions, scales of premiums, technical bases used in particular for calculating scales of premiums and technical
provisions or forms and other printed documents which an assurance undertaking intends to use in its dealings with policyholders.
Notwithstanding the first subparagraph, for the sole purpose of verifying compliance with national provisions concerning
actuarial principles, the Member State of origin may require systematic communication of the technical Bases used in
particular for calculating scales of premiums and technical provisions, without that requirement constituting a prior
condition for an undertaking to carry on its business.
Not later than five years after the date of application of this Directive, the Commission shall submit a report to the Council
on the implementation of those provisions.
Comments on UK transposition
The Directive’s provision was transposed into UK legislation by Regulation 4 and Schedule 1,
paragraph 11 of the Insurance Companies Regulations 1994. According to those rules,
applicants are no longer required to submit information on the general and special policy or
treaty conditions which the company proposes to use. This information was required by the
Insurance Companies Regulations 1981 but since the Insurance Companies Regulations 1994
came into force the applicant only needs to provide information on “the nature of the
commitments which the company proposes to cover” but not on the issues mentioned above.
Link to the ELAS case
Unclear. For further information on this point, see Part III on Regulatory Action.
Divergences between the 3LD and implementing provisions: none found.
Article 30 - Cancellation period (Articles 15 of 2LD and 35 of CD)
Summary of objectives
This article requires Member States to have a cancellation period for policyholders of between
14 and 30 days from the time when he/she is informed that the contract has been concluded.
Text of the article
Article 30
1. In the first subparagraph of Article 15 (1) of Directive 90/619/EEC the words 'in one of the cases referred to in Title III'
shall be deleted.
2. Article 15 (2) of Directive 90/619/EEC shall be replaced by the following:
'2. The Member States need not apply paragraph 1 to contracts of six months' duration or less, nor where, because of the
status of the policy-holder or the circumstances in which the contract is concluded, the policy-holder does not need this
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special protection. Member States shall specify in their rules where paragraph 1 is not applied.'
Comments on UK transposition
In its original version, this provision allowed Member States not to provide for a cancellation
period only in the case of contracts of six months’ duration or less. Article 30 of the 3LD
introduces a second exception, allowing Member States not to provide for a cancellation
period when, according to the status of the policyholder or the circumstances in which the
contract is concluded, there is no need for this special protection. The provision leaves it up
to each Member State to specify the rules stating where, according to the prescribed
guidelines, the cancellation period is not applied. The UK transposed this Article into UK
legislation via the Insurance Companies (Cancellation) Regulations 1993 and the Insurance
Companies (Cancellation No 2) Regulations 1993 subsequently replaced by the Insurance
Companies Regulations 1994. Regulation 2 of the Insurance Companies (Cancellation)
Regulations 1993 amends section 75 (Statutory notice by insurer in relation to long-term
policy) and section 76 (Right to withdraw from transaction in respect of long-term policy) of
the ICA 1982.
Link to the ELAS case
Unclear. For further information on this point, see Part III on Regulatory Action.
Divergences between the 3LD and implementing provisions: none found.
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II.1.3. Relevant articles from other Directives

First Life Directive (1LD), 1979/267/EC
Article 18.3 on use of future profits (which became Article 27.4 of the CD) [See also the
context of Article 18 3LD on technical provisions, Article 21 3LD on inclusion of assets in
technical provisions and Article 25 3LD on solvency.]
Upon application, with supporting evidence, by the undertaking to the supervisory authority of the member state in the
territory of which its head office is situated and with the agreement of that authority :
( a ) an amount equal to 50 % of the undertaking's future profits ; the amount of the future profits shall be obtained by
multiplying the estimated annual profit by a factor which represents the average period left to run on policies ; the factor
used may not exceed 10 ; the estimated annual profit shall be the arithmetical average of the profits made over the last five
years in the activities listed in article 1 .
the bases for calculating the factor by which the estimated annual profit is to be multiplied and the items comprising the
profits made shall be defined by common agreement by the competent authorities of the member states in collaboration with
the commission . pending such agreement , those items shall be determined in accordance with the laws of the member state
in the territory of which the undertaking ( head office , agency or branch ) carries on its activities .
when the competent authorities have defined the concept of profits made , the commission shall submit proposals for the
harmonization of this concept by means of a directive on the harmonization of the annual accounts of insurance undertakings
and providing for the coordination set out in article 1 ( 2 ) of directive 78/660/eec ( 7 ) ;
( b ) where zillmerizing is not practised or where , if practised , it is less than the loading for acquisition costs included in the
premium , the difference between a non-zillmerized or partially zillmerized mathematical reserve and a mathematical reserve
zillmerized at a rate equal to the loading for acquisition costs included in the premium ; this figure may not , however ,
exceed 3,5 % of the sum of the differences between the relevant capital sums of life assurance activities and the mathematical
reserves for all policies for which zillmerizing is possible ; the difference shall be reduced by the amount of any
undepreciated acquisition costs entered as an asset ;
( c ) where approval is given by the supervisory authorities of the member states concerned in which the undertaking is
carrying on its activities any hidden reserves resulting from the under-estimation of assets and over-estimation of liabilities
other than mathematical reserves in so far as such hidden reserves are not of an exceptional nature.

Consolidated Directive (CD), 2002/83/EC
Article 17, duties of auditors (originally Article 5 of Directive 95/26/EC) [See also the context
of Article 15 of 3LD on professional secrecy.]
1. Member States shall provide at least that:
(a) any person authorised within the meaning of Council Directive 84/253/EEC (1), performing in an assurance undertaking
the task described in Article 51 of Council Directive 78/660/EEC (2), Article 37 of Directive 83/349/EEC or Article 31 of
Council Directive 85/611/EEC (3) or any other statutory task, shall have a duty to report promptly to the competent
authorities any fact or decision concerning that undertaking of which he/she has become aware while carrying out that task
which is liable to:
— constitute a material breach of the laws, regulations or administrative provisions which lay down the conditions governing
authorisation or which specifically govern pursuit of the activities of assurance undertakings,
or
— affect the continuous functioning of the assurance undertaking or
— lead to refusal to certify the accounts or to the expression of reservations;
(b) that person shall likewise have a duty to report any facts and decisions of which he/she becomes aware in the course of
carrying out a task as described in (a) in an undertaking having close links resulting from a control relationship with the
assurance undertaking within which he/she is carrying out the abovementioned task.
2. The disclosure in good faith to the competent authorities, by persons authorised within the meaning of Directive
84/253/EEC, of any fact or decision referred to in paragraph 1 shall not constitute a breach of any restriction on disclosure
of information imposed by contract or by any legislative, regulatory or administrative provision and shall not involve such
persons in liability of any kind.

Directive 2002/12/EC, Solvency I
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Article 1.4 on use of future profits (originally Article 18.3 of 1LD) [See the section on
Article 25 of the 3LD.]
4. Upon application, with supporting evidence, by the undertaking to the competent authority of the home Member State and
with the agreement of that competent authority, the available solvency margin may also consist of:
(a) until 31 December 2009 an amount equal to 50 % of the undertaking's future profits, but not exceeding 25 % of the lesser
of the available solvency margin and the required solvency margin. The amount of the future profits shall be obtained by
multiplying the estimated annual profit by a factor which represents the average period left to run on policies. The factor
used may not exceed 6. The estimated annual profit shall not exceed the arithmetical average of the profits made over the last
five financial years in the activities listed in point 1 of Article 1.
Competent authorities may only agree to include such an amount for the available solvency margin:
(i) when an actuarial report is submitted to the competent authorities substantiating the likelihood of emergence of these
profits in the future; and
(ii) in so far as that part of future profits emerging from hidden net reserves referred to in point (c) has not already been
taken into account;
(b) where zillmerising is not practised or where, if practised, it is less than the loading for acquisition costs included in the
premium, the difference between a non-zillmerised or partially zillmerised mathematical provision and a mathematical
provision zillmerised at a rate equal to the loading for acquisition costs included in the premium. This figure may not,
however, exceed 3,5 % of the sum of the differences between the relevant capital sums of life assurance activities and the
mathematical provisions for all policies for which zillmerising is possible. The difference shall be reduced by the amount of
any undepreciated acquisition costs entered as an asset;
(c) any hidden net reserves arising out of the valuation of assets, in so far as such hidden net reserves are not of an
exceptional nature;
(d) one half of the unpaid share capital or initial fund, once the paid-up part amounts to 25 % of that share capital or fund,
up to 50 % of the lesser of the available and required solvency margin.

Directive 2005/1/EC on a new organisational structure for financial services committees
Articles 5 to 8 establishing EIOPC
Article 5
Directive 91/675/EEC
Directive 91/675/EEC is hereby amended as follows:
1. in the title, the words "Insurance Committee" shall be replaced by the words "European Insurance and Occupational
Pensions Committee";
2. "Article 1
1. The Commission shall be assisted by the European Insurance and Occupational Pensions Committee established by
Commission Decision 2004/9/EC of 5 November 2003 [23] (hereinafter the Committee).
2. The chairperson of the Committee of European Insurance and Occupational Pensions Supervisors established by
Commission Decision 2004/6/EC [24] shall participate at the meetings of the Committee as an observer.
3. The Committee may invite experts and observers to attend its meetings.
4. The secretariat of the Committee shall be provided by the Commission.
3. "Article 2
1. The period laid down in Article 5(6) of Decision 1999/468/EC shall be set at three months.
2. The Committee shall adopt its rules of procedure.
4. Articles 3 and 4 shall be deleted.
Article 6
Directive 92/49/EEC
In the first sentence of Article 40(10) of Directive 92/49/EEC, the words "submit to the Insurance Committee set up by
Directive 91/675/EEC a report summarising" shall be replaced by the words "inform the European Insurance and
Occupational Pensions Committee of".
Article 7
Directive 98/78/EC
Directive 98/78/EC is hereby amended as follows:
1. Article 10a(3) shall be replaced by the following:
"3. Without prejudice to Article 300(1) and (2) of the Treaty, the Commission shall, with the assistance of the European
Insurance and Occupational Pensions Committee, examine the outcome of the negotiations referred to in paragraph 1 and
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the resulting situation.";
2. Article 11(5) shall be replaced by the following:
"5. Not later than 1 January 2006 the Commission shall issue a report on the application of this Directive and, if necessary,
on the need for further harmonisation.".
Article 8
Directive 2002/83/EC
Directive 2002/83/EC is hereby amended as follows:
1. in the first sentence of Article 46(9), the words "the Commission shall submit to the Insurance Committee a report
summarising" shall be replaced by the words "the Commission shall inform the European Insurance and Occupational
Pensions Committee of";
2. Article 58 shall be replaced by the following:
"Article 58
Information from Member States to the Commission
(a) of any authorisation of a direct or indirect subsidiary, one or more of whose parent undertakings are governed by the
laws of a third country;
(b) whenever such a parent undertaking acquires a holding in a Community assurance undertaking which would turn the
latter into its subsidiary.
When the authorisation referred to in point (a) is granted to the direct or indirect subsidiary of one or more parent
undertakings governed by the law of third countries, the structure of the group shall be specified in the notification which the
competent authorities shall address to the Commission and to the other competent authorities.";
3. Article 65(1) shall be replaced by the following:
"1. The Commission shall be assisted by the European Insurance and Occupational Pensions Committee established by
Commission Decision 2004/9/EC [26].
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II.2.
Further evidence on transposition
II.2.1. Evidence by the Commission
As an introduction, it is useful to recall first of all what are the precise responsibilities of the
Commission in terms of the transposition of EU law1. Article 211 of the EC Treaty states that
the Commission is charged with monitoring the application of Community law, which entails:
1) verifying if Member States have adopted implementing national measures and
communicated them to the Commission within the prescribed time limit;
2) verifying the conformity of national transposition measures with Community legislation;
3) ensuring the actual respect of the provisions by private and public entities, bodies and
authorities (enforcement).
It is with these benchmarks in mind that the EQUI Committee took evidence from the
Commission. Firstly, the Commission, represented by Insurance unit Director Elmer
TERTAK, attended the EQUI hearing of 23 March 2006 (oral evidence H1). Further written
exchanges also took place. Secondly, the Internal Market Commissioner, Charlie
McCREEVY, gave evidence on 23 November 2006 (oral evidence H8). During all these
exchanges, the Commission responded to questions asked by Members and presented
evidence requested from it on the transposition of the relevant Directives and their application
by competent authorities during the reference period, as well as on action taken by the
Commission with regard to monitoring implementation. This evidence includes the
implementation study on the 3LD by the UK law firm Wilde Sapte (WE 20), a list of
infringement procedures (WE 19) and a list of all documents related to ELAS in the
Commission's possession, including letters, e-mails and other miscellaneous documents (WE
39). A paper on home/host issues was also prepared by the Commission (WE 41). Further
information was received in WE Conf-11: the review of the implementation study,
information on the identity of officials in charge at the time, information on responsible
people at the Wilde Sapte firm, and other issues.
Summary of themes arising from oral and written evidence
1. Correct and timely implementation of 3LD
Mr. Elmér TERTAK, Director for Financial Institutions in the Internal Market and Services
Directorate-General of the Commission, claims that, according to the evidence in his
possession, "the UK implemented the 3LD in time and correctly" (H1). This was proven by
the fact that that Member State "notified the Secretary-General of the Commission of its
implementation of the 3LD by letter dated 29 June 1994.” In this letter the UK specified that
the implementing provisions “would enter into force on 1 July 1994, the deadline laid down
in the Directive. The UK thus respected the deadline for entry into force laid down in the
Directive, and followed the correct practice in its notification and provided copies of the
implementing legislation.” The Commission checked Member States' compliance in
conjunction with outside consultants who produced an implementation report and detailed
1
The nature of the responsibilities of the European Commission is dealt with in extenso in Part V of the report.
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correlation table. The study covering the transposition of both the 3LD and the non-life
Directives was carried out by the law firm Wilde Sapte. Greece and Spain were not included.
Mr TERTAK claims that the report and the Commission services' examination of it and of the
UK implementing legislation "did not point to any major gaps or problems as regards UK
implementation" (H1).
Commissioner McCREEVY in H8 reiterates that "our conclusion was that the UK had
correctly transposed the Third Life Assurance Directive into its national legislation."
2. Role of the Commission
Mr TERTAK clarified that the Commission "has no direct role in the supervision of
individual insurance undertakings in Member States and that EU insurance directives do not
confer specific supervisory powers upon the Commission, nor does the Commission authorise
and supervise undertakings wishing to write insurance business, and that it falls to the
responsibility of each Member State to organise and effect this national supervisory
responsibility" (H1). The task of the Commission is to ensure that, in exercising these
supervisory powers, Member States respect their obligations under the relevant EC directives
and do not hinder the proper functioning of the internal market. Only where there is a failure
to fulfil these obligations under the Treaty is the Commission allowed to open formal
infringement proceedings.
Commissioner McCREEVY describes the difficulties the Commission faces sometimes (H8):
"Checking Member States’ implementation of Community legislation is a difficult exercise. It
is time and resource-intensive. There are linguistic problems. Translations are not always
available. Member States frequently implement our directives by amending multiple pieces of
existing legislation and often fail to provide transposition tables." He then goes on to add: "I
must stress, however, that the Commission is not responsible for the supervision of individual
insurance undertakings. That is the job of the national authorities. Nor can we stand behind
the national supervisors to make sure they are doing their job properly. As I and my officials
have stated before, the Commission is not and cannot be the supervisor of the supervisors."
3. Infringement procedures: minor ones were launched but are now closed
Mr. TERTAK claims in H1 that at the present time, the Commission is not aware of any
infringement of the EU insurance directives in connection with ELAS and that they are not in
a position to take a definitive view on whether there might have been an infringement in the
practical application of the directive in the case of ELAS and, even if they were able to take
such a view and were convinced that there had been an infringement in practice, it would not
be able to take infringement proceedings before the Court, on account of the Commission's
role and of the nature of infringement proceedings under the Treaty as interpreted by the
Court of Justice. Mr TERTAK expanded by saying "that most of infringements at DG Markt
level, to my best knowledge are there because (…) those who believe that something is
derailing from the line are coming to the Commission, bringing to our knowledge that
something is going wrong. Of course, the minute we do get evidence and a clarification that
there indeed there is a breach of the rules, we are taking actions; but on the other hand we
are not entitled to be a police and we do have the limitation I quoted from the Court and
within that boundaries we have to act."
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Mr. BEVERLY from the Commission clarifies that infringement "is not a simply wrongdoing,
but if this wrongdoing is really related to breach of Community law and this is however again
something which needs evidence. To summarize, we did not have any evidence to my best
knowledge at that time, that we could have started any infringement procedures and we didn't
receive any complaints, again to our best of knowledge at that time, which would have
initiated that any infringements procedures should have been started against the UK for not
complying in relation with Equitable Life with the prescription of the Third Life Directive."
However, the Commission sent the committee a list of the infringement procedures (WE 19)
that had been opened with Member States with regards to the 3LD. This list states that
"proceedings for incorrect application were launched against a number of Member States,
including the UK, with regard to specific aspects of their national measures. In the case of the
UK, for example, the problem related to the exchange of statistical information between
supervisors." WE 19 clarifies that "all these cases have now been closed" and that "none of
them appear to relate to the core prudential requirements of the directive."
4. Absence of complaints to the Commission before 2001 - The Commission cannot act
against alleged past infringements that have been corrected
Mr. TERTAK, under questioning, clarified that when facts are not brought to the
Commission's attention in due time, formally they do not exist. This applies to the ELAS case,
where, at the time, no-one notified the Commission. However, it should be borne in mind that
the Commission can obtain information in other ways.
On the issue of correspondence on ELAS in the Commission's possession, Mr TERTAK
claims in H1 that "the earliest correspondence that appears on the Commission's files dates
from early 2001, with letters from Mr James Elles MEP and Mr Roy Perry MEP. Mr Perry
wrote again to Commissioner Bolkestein in July 2001 following the collapse of the
Independent Insurance Company and following Equitable Life's decision to cut pension policy
values by 16%. Mr Perry asked the Commission whether it was satisfied that the European
directives had been adhered to in these matters." Mr. TERTAK then went on to say that the
Commission will continue to search in its historical archives for exchanges prior to that date.
Commissioner McCREEVY, in H8, reiterates these facts: "The Commission did not become
aware of the problems of Equitable Life until early 2001, when Members of this Parliament
began to contact us on behalf of their constituents who were Equitable policyholders. We
have provided you with a full list of all our documents on Equitable Life. The UK authorities
reacted quickly following the Society’s crisis and closure to new business. On the basis of the
Baird Report and the Tiner Reforms, the United Kingdom has radically changed its rules on
life assurance in general, on with-profits policies in particular, on mutuals and on the role of
the actuary. I think one can safely say that the regime that applied prior to the crisis at
Equitable Life no longer exists."
With regard to the issue of Commission involvement, Clive MAXWELL in H4 states that on
the issue of "the involvement of the Commission in the follow-up to Equitable Life, I have no
details in front of me of any involvement of the European Commission in taking up individual
cases".
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On a related point, the Commission insisted that it could not express an opinion or investigate
infringements that have been remedied by the Member State concerned. This was due to the
nature of infringement proceedings, whose objective was merely to ensure compliance with
EU law. Victims of past infringements could still test the compatibility of the Member State's
conduct through national courts. Members expressed astonishment that there is no way to
reopen infringement cases or investigate past infringements, especially when the detrimental
effect of those infringements is only revealed at a later stage.
Finally, Alan BEVERLY from the Commission, in H7, defends his institution's actions,
reiterating Mr TERTAK's views, by saying that the "the role of the Commission is not to be a
supervisor of the supervisors. It is not our mandate and we cannot possibly do that. We have
said to you before that, having checked that implementation has been carried out in Member
States, we are then virtually dependent on complaints or letters from citizens to have an idea
of whether something is going wrong. Again, as we have informed you, we were not informed
of any problems before the earliest letters we received, which were sent in 2001, after the
closure to new business [...] Why did we not hear anything before 2001? It was probably
because in the 1990s people leaving Equitable Life left with generous payments and had no
reason whatsoever to complain".
5. Implementation reports done by UK firm
At the request of committee members, the Commission provided the so-called implementation
reports of the 3LD. The report was produced by a UK private law firm called Wilde Sapte.
The report includes an overall summary as well as nine individual country correlation reports.
The Commission states that the Directive was implemented too late in two countries to be
caught by the report. Mr. VAN HULLE from the Commission, explained that the usual public
tender was followed in order to select the firm, and that it was selected to do a study on the
whole of the EU, which also includes the UK; it is unfortunate that there was such a linkage,
but at the time that the study was carried out the ELAS affair had not arisen. The Commission
"tries to select usually a firm which has contacts in all the Members States" (H1), a difficult
endeavour.
Commissioner MCCREEVY (H8) also explained how "how we checked the implementation
of the third generation of insurance directives back in 1994-95 using in part a study
commissioned from a well-known law firm. We have made available to you the study reports
and our own internal papers which show clearly the problems encountered. Those papers
also show the considerable efforts of Commission officials to achieve value for money and
obtain the best possible result."
6. Transposition: Commission can only view a 'snapshot'
Mr. TERTAK, under questioning, admitted that when analysing the transposition of a
directive "you can just get a snapshot of any given time which not automatically covers what
will happen afterwards (…). We should not forget that above all institutions, especially those
which do have supervisory powers, the National Parliaments are also exercising a certain
supervision, and one would expect the democratic Parliament is sufficient to overview
institutional acting in their boundaries, and whether they are fulfilling that law, since the
directives are being transposed by their national laws." In WE-Conf 11, the lack of resources
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for the Commission in the area of transposition (especially linguistic capabilities, as the
implementing legislation received is not even translated) becomes apparent, reinforcing the
impression that the Commission can only perform adequate monitoring of transposition if it
has more means at its disposal.
On the issue of resources, Commissioner McCREEVY alludes in H8 "to some of the
difficulties in checking the transposition record and the problems that there are and the
problems there have been in the past. Since the new Barroso Commission and since my
tenure, better regulation has been the theme of the Barroso Commission. One of the things it
means is better regulation coming from Europe. Therefore, logically, there should be more
people available in the whole system to police the transposition of directives, the
implementation, infringement proceedings, etc."
7. Transposition has elements of box-ticking
Under questioning from Members, Mr. TERTAK admitted that, as regards the functioning of
the single market aspects, it could only be that the creation, adoption and implementation of
new life insurance directives was a box-ticking exercise "because we were creating something
new, making it easier for the European companies to offer freedom of services, in particular,
across frontiers. So we carried out the examination of implementation fairly soon after the
deadline for implementation. So, almost by definition, there was no experience of the
practical application of the new measures at that stage (...). So, there is an element of boxticking but there is much more to it as well".
During the different debates, Members have raised the idea that transposition is currently a
static and short-sighted exercise which needs to become more forward-looking, for example,
by evaluating the quality of a piece of legislation across the first few years of its application
and not just at the outset. Reference was made to this by Commissioner McCREEVY in H8:
"It is our job to make sure that the rules are applied. So how can we best achieve our
objective? With the resources at our disposal, we can hardly send out teams of officials
looking for cases of incorrect application in our 25 – soon to be 27 – Member States. But
what we can do, and are already doing, is to encourage the Member States’ regulators and
supervisors to work more and more closely together. As their cooperation becomes
increasingly close and regular, as they carry out peer reviews, adopt protocols or
memorandums of understanding for the coordinated application of specific directives and
generally pursue a policy of supervisory convergence, we will find that problems of incorrect
application of Community legislation will be picked up and solved at an earlier stage."
8. Quality of the implementation reports and review
The issue of whether lessons should be sought by the Commission from this particular case
was raised by Members. They also asked during H1 whether a review of the review of the
implementation studies had been done. Under questioning, the Commission admitted it was
"not satisfied with the conduct of the study in respect to certain countries" (H1). It will
undertake to compile a full dossier from the historical archives, in order to inform the
committee as to where and on what points and in relation to which countries they were not
satisfied with the study (WE-Conf 11). Mr. BEVERLY claims that a review of the study was
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undertaken. He said that "at the time the study was carefully reviewed, because we certainly
raised problems with the consultant at that time" (H1).
However, this evidence seems to contradict what is said in WE 19, where the Commission
states that "it is clear from the papers and from our contacts with a retired official that major
problems were encountered in the course of the execution of the study. The final outcome was
that an improved version of the interim report became the final report and the final budget
was reduced by 50%." The Commission concludes that "no written review of the study was
carried out" but it claims that it can confirm that "the officials then responsible for the study,
while not checking all the work of the consultants in all the individual Member States,
nevertheless played an active role in monitoring the production of the study". Also in WE 19,
the Commission states that "it is clear that the UK coverage of the report is one of the
sounder aspects of the study". These assertions would seem to be corroborated in WE Conf11.
9. No comitology provisions
Under questioning, the Commission stated that the 3LD did not foresee any comitology
procedure for implementation of technical details. The Directive was implemented straight as
it came from the Parliament and the Council of Ministers and there was no comitology
process for technical details.
10. Solvency II is a major overhaul
The Commission believes (H1) that “we should recall that the Insurance Directives contain
mostly minimum rules, and that is the reason why Member States sometimes want to add on to
those rules (…). We are preparing "Solvency II" which is a major overhaul of the solvencies
requirements for insurance companies. We have been working on that for some time now, ... ,
and the reason why we do that is based on experiences such as Equitable Life." According to
the Commission, the Solvency II directive "will have a system which is more risk-sensitive, so
that everybody concerned, the supervisors as the companies themselves, will be forced to look
into the risks of the products they put on the market; such as the capital-market risk that was
a major issue also in this case of Equitable Life."
Commissioner McCREEVY in H8 comments on Solvency II: "Our current top insurance
priority is the Solvency II project. The ambition is nothing less than to bring about a
fundamental revision of insurance regulation and supervision in the European Union. The
current solvency regime, like many of us, regrettably, is showing its age! Solvency margin
requirements for insurers were first introduced at EU level over 30 years ago and the method
of calculation has remained essentially unchanged since then. They were designed for an
insurance industry and a world that no longer exist. Insurance directives set out minimum
standards that can be and are supplemented in a variety of ways by additional rules at
national level. We thus have no real common basis."
Speaking of the issue of using more regulations instead of directives, McCREEVY then goes
on to say that "in the Solvency II directive we intend to have as much harmonisation as
possible and not have all these derogations, etc. However, as these directives go through the
process of the Council Ministers and the European Parliament, inevitably things get added on
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and we do not have correct harmonisation. Let us be very honest about it: not many Member
States are jumping up and down asking for the Commission to be given more direct power in
those areas and not to have these derogations. It is not happening in any area, least of all the
financial services. Let us be brutally frank about it. Even in the most pro-European countries
I do not see any of the ministers, whatever their political persuasion – centre, right or left –
wanting that. There are very good reasons from their perspective as to why they would not
want to go in that direction, so it is a difficult argument altogether."
11. Improved financial information, parallelisms with ENRON
On the issue of the lack of information provided to investors, Mr TERTAK (H1) retorts that
"presently financial information requirements and transparency requirements have
tremendously increased and improved over the last years. [...] We haven't made an analysis
yet, whether or not the practice in the UK was at that time the best practice, or at least not
very far from the European level. But one thing is sure: do not compare early regulations with
the present ones because the present regulations always contain all the lessons which have
been acquired in the course of time. Surely also Enron has brought a lesson, as nobody was
aware, but somebody turned out and it happened that a lot of regulations concerning
reporting requirements, auditors' duties, all this has been changed in the US and similarly
some changes will come also in Europe."
12. Philosophy of 3LD: minimum harmonisation, mutual recognition and home country
control but host country can apply general good rules
Alan BEVERLY, in H3, summarizes the overall philosophy underpinning the 3LD.
According to him “the impression has been created (…) that the host country, the country of
the branch, has no possible role whatsoever. That is not strictly accurate. It is quite true that
the directives and, in particular, the third directives, set out a minimum basis of
harmonisation, that is the minimum harmonisation of insurance law across the Member
States”. This minimum harmonisation is the “basis for mutual recognition and home country
control – that is the European Passport system.” As far as branches are concerned, the
undertaking wishing to create a branch in another country can be subjected to “the obligatory
rules that are to be applied in the country where the branch is situated on the basis of the
general good. That is a political choice up to the country hosting the branch, but it is not
completely eliminated from the picture, it is able to tell the insurance undertaking
establishing the branch what the local rules are that must be respected.” This concept of the
general good is dealt with in Article 40(4) of the codified life directive. According to it, the
country of the branch has considerable control over the selling arrangements and the way in
which information must be provided to policyholders.
In a subsequent paper on home/host issues prepared by the Commission (WE 41), these issues
are expanded: "the home Member State is responsible for financial supervision. But it also
bears a more general responsibility for the conduct of the insurers it authorises and is
ultimately responsible for ensuring compliance by the insurer with the provisions relating to
the general good existing in the various host Member States in which it carries on its
business. The Member State where a branch is established or into which cross-frontier
services are provided also has a role to play, particularly as regards checking compliance
with local provisions applicable to insurance contracts which aim to protect the general
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good. It is not deprived of all means of monitoring the insurance business carried out by
insurers from other Member States and can require the application of its own conduct of
business rules justified by the general good. The Directive can only work smoothly if there is
good co-operation between home and host State authorities. It is not a satisfactory situation
where aggrieved policyholders are referred by the host State authority to the home State
authority and are then sent back by the home to the host authority, and thus find themselves
unable to have their case examined by either."
II.2.2. Evidence from implementation study (WE 20)
The study covering the transposition by the Member States of both the 3LD and the third nonlife directive was carried out by the UK law firm Wilde Sapte. The final report was presented
to the Commission services on 14 November 1995. The study did not cover all the then 12
Member States as Greece and Spain were late with implementation.
The study is divided into three parts: one detailed analysis under 7 specific headings specified
by the Commission, another one on specific divergences between the directive and UK
implementing legislation, and a third section with practical issues arising in relation to
implementation.
Summary of themes arising from the study
In general it can be argued that the implementation study does not say much about the quality
of transposition. Firstly, the text itself is quite short, vague and imprecise. Secondly, as the
implementing provisions transposing the 3LD are spread out in 3 different UK implementing
acts, it is difficult to obtain a coherent picture. Additionally, the study shows how some of the
directive’s provisions were simply not transposed as they were considered by the UK
authorities as being covered already by existent UK law, complicating matters still further.
The study was accompanied by a detailed correlation table1 (up to 300 pages), simply
specifying for each article of the directive the matching article in the UK implementing
provisions. In order to verify the level of coherence and quality of UK transposition, it has
been necessary to check each and every one of the UK implementing provisions. This task has
been performed with the help of the experts’ study on transposition (ES 1) commissioned by
the EQUI Committee. This study, financed from the committee’s expertise budget, not only
focuses on UK transposition but also tries to make a comparison with other Member States’
transposition of the 3LD (See Part II.1 ‘Transposition in detail’ for a more precise article-byarticle analysis of UK transposition).
Overall, no clear-cut conclusion emerges from the Wilde Sapte study and the accompanying
correlation table as to whether there is a lack of adequate transposition. As discussed below,
the Commission seemed satisfied with the results of the study and with transposition in
general.
1
Available to interested parties on demand (available in paper version only).
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1. Conditions on obtaining authorisation: sound and prudent management; notifiable
persons; disclosure of information;
According to the study, and in compliance with articles 7 and 14 of the 3LD "companies must
be managed in accordance with the principles of sound and prudent management". The study
argues that the UK implementing provisions "place new requirements on directors which
require the maintenance of a system of control." It concludes by stating the obvious, i.e., that
"the DTI has powers to take regulatory actions if insurance companies are not soundly and
prudently managed".
On notifiable persons the study does not add much other than describing the articles from the
UK implementing provisions. On disclosure of information, the study claims that the UK
implementing provisions respect the higher information requirements contained in the 3LD.
The provisions are sparsely implemented throughout different Acts.
2. Technical provisions, detailed analysis
The study finds no divergences with the 3LD of the UK implementing provisions, other than
Article 22(1). See below, 'divergences'.
3. Establishment of branches
The study goes into detail on authorization and notification procedures and on how the DTI
intended to fulfil the requirements in this regard. It is not clear from the text whether there is a
lack of adequate transposition and the Commission seemed satisfied with the explanations
given.
4. Rules protecting the general good
The study describes how the UK advisory authorities did not prepare a list of conditions
described as constituting the general good. Instead, they prepared a non-exhaustive list
outlining the principal enactments which regulate insurance business in the UK and which
may apply to foreign insurers writing business in the UK. This includes, amongst other things,
rules on advertising, disclosure of links by intermediaries, misleading information, cessation
of cover (no specific rules), issues of language, choice of law (free in the UK) and
cancellation rights (there are none in UK law).
5. Specific divergences:

Article 12
"The UK implementing provisions do not specifically require the Secretary of State to inform
the competent authority of the Member State of the commitment which the risk is situated in
the relevant circumstances." The DTI felt this was unnecessary as the Secretary of State
already had to the power to exchange information with other competent authorities under
existing UK legislation.
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
Article 13
"The UK implementing provision does not state that the UK supervisory authority must
inform the competent authority of the other Member States" in the event of the withdrawal of
authorisation of another Member State, as is required by the Directive.

Article 14(2)
"The UK supervisory authority felt that, since it has no power to object to a disposal, it was
irrelevant whether notification took place before the disposal or seven days after." Therefore,
this article was not transposed.

Article 21(1)
This article provides that assets covering technical provisions shall be valued net of any debts
arising out of their acquisition. This provision was not fully implemented. The study says that
it received information from the DTI saying that UK legislation already provides for liabilities
to be properly covered by assets.

Article 22(1)
This article provides that assets covering technical provisions should be invested to no more
than a specified percentage in specified assets. The UK implementing legislation imposes the
percentage restrictions by reference not to technical provisions but to long-term business
amounts. The study says "the competent authority felt that it was not necessary to change this
approach because the UK rules are, in the majority of cases, more prudent than the rules set
out in the Directives."
6. Practical issues relating to implementation
The study points out that implementation was "achieved wholly by subordinate legislation". It
argues that "the framework in the Directives largely followed the existing UK regulatory
system. Consequently, there has been no need for substantial changes in the style of UK
supervision."
The study says that, at the time, "no concern has been expressed by ABI, Royal or Lloyd's
with regard to the technical divergences between the Directive and the UK implementing
provisions." The only concerns raised were in respect of how to ascertain what the 'general
good' provisions are.
It subsequently explains that "from the perspective of the UK it seems that, purely for
commercial reasons, the implementation of the Directives has not substantially altered
existing patters of, or increased, cross-border trade by UK insurance companies."
Another issue is that "UK companies are also deterred from expanding into other Member
States because they are concerned that they may encounter legal problems in view of the nonharmonisation of contract law and the need in to long term business to provide contracts
which will be subject to the local law of the host country."
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7. Review of the study
The Commission claims (H1) that "the report and the Commission services' examination of it
and of the UK implementing legislation did not point to any major gaps or problems as
regards the UK implementation of the third life directive." However, in WE 19, the
Commission states that "it is clear from the papers and from our contacts with a retired
official that major problems were encountered in the course of the execution of the study. The
final outcome was that an improved version of the interim report became the final report and
the final budget was reduced by 50%." The Commission concludes that "no written review of
the study was carried out" but it claims that it can confirm that "the officials then responsible
for the study, while not checking all the work the consultants did in all the individual Member
States, nevertheless played an active role in monitoring the production of the study". Also in
WE 19, the Commission states that "it is clear that the UK coverage of the report is one of the
sounder aspects of the study". In H8, Commissioner MCCREEVY explains how the
Commission has made available to the EQUI committee the study reports and the
Commission’s internal papers “which show clearly the problems encountered. Those papers
also show the considerable efforts of Commission officials to achieve value for money and
obtain the best possible result."
In WE-Conf 11, we find possible proof of the overall poor quality of the Wilde Sapte study
and the fact that the Commission tried its best to obtain changes and improvements to the text.
This raises the question of the general quality and management of the Commission's
procurement procedures for these kinds of external studies at the time and whether these
practices have improved since then.
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II.2.3. Other selected written and oral evidence on transposition
From other written and oral evidence, it is surprising to note how few times the directives and
the issue of correct/incorrect transposition is mentioned. Witnesses and other experts
(Penrose, Baird) understandably always make reference to UK law and UK regulatory
practice. It is therefore difficult to separate what is clearly an issue purely related to
transposition from matters relating to supervision and regulation of ELAS. The emphasis on
the latter is dealt with in much more detail in Part III on regulatory practice. In order to
structure the investigation, the different pieces of evidence are placed - where possible - under
headings which list each of the key articles of the 3LD. If no specific link is found to an
article, the evidence is placed under a ‘general themes’ heading:







General themes
Article 8 - Prudential supervision
Article 10 – Supervisory powers & accounting returns
Article 18 – Technical provisions
Article 25 – Solvency margin
Article 28 – General good
Article 31 – Information to policyholders
General themes
1. The unsatisfactory implementation and execution of the 2LD and the 3LD gave rise directly
to the weakness of regulation of ELAS
Mr. Tom LAKE, from the Equitable Members' Action Group (EMAG), claims that "the
implementation and execution of the 2LD and the 3LD was unsatisfactory and that this
directly affected the quality of the regulatory oversight of ELAS" (H1). He argues that the aim
of these directives - the adequate protection of policyholders - was not achieved by UK
regulation of ELAS.
2. Grave doubts that any of the 3 EC life directives were successfully transposed
Mr. JOSEPHS, in H2, declares that he and his association (Investors Association) "have grave
doubts as to whether any of the three EC life directives could have been successfully
transposed into the UK regulatory environment, given the differences of philosophy between
the Commission's intentions and the way in which the UK system actually worked."
Ms KNOWD, a policyholder, also claims in H2 that "Equitable was non-compliant with EUregulations over a sustained period of time".
3. The Commission should have been more proactive
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In H3, Peter SCAWEN from ELTA, believes that, in terms of the role of the Commission in
policing the implementation of EU law, it "is to be proactive. I think the failure in the UK was
that it was a passive department waiting on events, hoping, fingers crossed, that things might
get better. I think that is what took place. I believe they were very well aware but had no idea
what to do about it." It seems that Mr SCAWEN is referring to the UK authorities and not the
Commission.
4. 3LD was correctly implemented and UK law already complied with most of it
Mr MCELWEE in H3 is of the view that the UK “implemented the directive correctly. I have
not yet seen anything that suggests to me that there was any egregious manner in which it was
not properly implemented”. Clive MAXWELL, from HMT, claims in H4 that "the Third Life
Directive and its predecessors were correctly transposed into UK domestic law. In fact, the
pre-existing UK law already complied to a large extent with the provisions required by the
directive". Mr MAXWELL then listed the pieces of legislation through which the 3LD was
transposed into UK law, that is, the Insurance Companies (Third Insurance Directives)
Regulations of 1994, the Insurance Companies Regulations of 1994 and the Insurance
Companies (Accounts and Statements) Regulations of 1994. In addition, during H4, David
STRACHAN of the FSA claimed that "the UK consistently went beyond the formal
requirements of the Third Life Directive in implementing successive investor compensation
and ombudsman schemes".
5. The UK Government responsible for transposition
Mr MAXWELL, in H4, clarified that "the UK Government is responsible as a matter of law
for the correct transposition of directives in the UK. [...] With respect to the correct
transposition of European directives in the UK, it is ultimately for the Member State to be
responsible for that as a matter of European law."
6. Fragmented transposition does not affect the quality of transposition
Responding to a Member's question (H4) on whether if transposition into different acts and
regulations has any legal or other significance as to the seriousness with which the Directive
and other directives were transposed into UK law, Clive MAXWELL responded with a clear
no: "the law is the law: it does not matter whether something is covered in an act of
parliament or in a regulation of parliament or, for that matter, the FSA’s rule book. It still
has legal force and it is still a very valid way of transposing the directive.[...] I think that
many Member States have a system of transposing directives into a range of different
legislative instruments depending on their national arrangements. [...] It depends, of course,
on their national arrangements and traditions and how they regulate."
7. The directives are just a baseline
Martin McELWEE, in H3, takes a contrary view to other witnesses and states that "the
directives necessarily laid down a baseline for regulation and, consistent with the nature of a
directive as opposed to a regulation, they leave it to Member States to find the most
appropriate means to achieve the results required by the directive’s provisions. Directives are
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necessarily less prescriptive than regulations, which is why doubts as to their correct
implementation sometimes arise.”
This view was reinforced by Clive MAXWELL from HMT in H4: "The Third Life Directive,
like its predecessors, was a minimum harmonisation directive. [...] Member States were
required to implement in domestic legislation the minimum standards the directive contained
but could do so within the context of their domestic policy approach. It was not the intention
that Member States create identical domestic regimes."
8. Directives do not require a zero-failure regime
In H3, Mr MCELWEE also dispels the myth that the directives require, or even imply, a zerofailure regime: “It would be difficult to construct such a regime but I suspect that it could be
done, at least in theory. It would require a level of regulation that would, in my own view, be
contrary to the consumer’s ultimate interest. (…) There is nothing in the directives that
signals the intention to create such a regime.” Likewise, Clive Maxwell from HMT states
that "the regime did not, and still does not, seek to prevent all failures of or problems with
regulated firms" (H4).
9. Freedom with publicity, designed to stimulate innovation
In H4, Clive MAXWELL from HMT adds to the previous point by trying to explain how the
UK's approach to "prudential supervision was characterised as being one of ‘freedom with
publicity’. Insurance companies were given freedom within the applicable legislation to
determine their policies and make their own decisions, provided that certain information was
disclosed to the public. The approach was deliberately designed to avoid undue interference
in the affairs of companies, since this was thought likely to inhibit innovation and
entrepreneurial behaviour, which would have been to the detriment of policyholders and
consumer choice."
10. The regulators applied the law
Responding to a question from a Member as to whether the UK Government was satisfied that
the regulators, in relation to the entry into force of the 3LD, faithfully applied the
implementing provisions as well as the spirit of the directive, Mr MAXWELL states in H4
that regarding "the application of the law in practice, the regulators have applied the law."
11. Ultimate responsibility of the crisis lies in hands of ELAS management
In H3, Mr MCELWEE also says that “the ultimate reason why Equitable Life found itself in
this crisis lies squarely in the hands of the management, which was variously venal or
ignorant.” This is also one of the partial conclusions of the Penrose report (WE 16).
However, Brian CHASE GREY (WE 9) claims that the British Government is responsible for
the collapse of ELAS. He denounces collusion with ELAS over a 6-year period to suppress
evidence of the true cause of the collapse, a conspiracy that, according to him, at every stage
was inspired, sourced, and supported by HM Treasury. He supports these allegations by
referring to the Penrose Report (WE 16), the Burgess Hodgson report (WE 26) and the
Reports of Dr. Michael Nassim (WE 8, 7 and 33).
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On the issue of responsibility, WE Conf 3 claims that ELAS repeatedly lied concerning the
state of the company and the successes that they were enjoying. They were negligent in not
putting aside gains from stock market growth for ‘with profit’ policyholders nor making
provision for future payments of GAR policyholders. It also claims that management paid
itself large salaries, large bonuses and large pension benefits. It also contains claims against
the auditors, Ernst & Young, for not conducting a proper audit of Equitable Life’s Accounts
and ascertaining that there was not enough money to cover GAR policyholders' funds.
12. The regime must evolve, and the answer is Solvency II
In H4, Clive MAXWELL from HMT says that "no system of supervision can stand still in
ever-changing markets. It is important that the European framework for the supervision of life
insurance companies continues to evolve to secure an appropriate level of protection for
policyholders. The UK Government, therefore, supports the European Commission’s Solvency
II project".
Article 8 - Prudential supervision
13. Article 8 of the 3LD not respected
Article 15(3) of the 1LD as amended by the 3LD (Article 8) provides that the competent
authorities of the home Member State shall require every assurance undertaking to have sound
administrative and accounting procedures and adequate internal control mechanisms. Again,
this provision was not correctly followed, argues Mr. LAKE in H1. His argument is as
follows: an essential part of the UK national insurance framework is the qualified Appointed
Actuary whom insurers appoint to advise on reserving, bonuses, expectations etc. and who
should act partly as a guardian of policy-holders' interests. Mr. LAKE claims that the fact that
in 1992 "Appointed Actuary Roy Ranson became CEO of ELAS without relinquishing the role
of Appointed Actuary was clearly prejudicial to the interests of policy-holders but that UK
legislation did not provide for the removal of Mr Ranson" (H1). It follows, according to
Mr. LAKE, that faulty implementation rendered the UK authorities powerless. The UK GAD
explicitly expressed its disapproval of Mr Ranson's dual role but did nothing.
Mr. HOLMES (WE 84) also goes into detail on the issue of lack of sound administrative and
accounting procedures and adequate internal control mechanisms, namely the Appointed
Actuary issue problem, quoting at length Penrose (WE 16) and repeating the allegations
contained therein.
However, Clive MAXWELL from HMT, under questioning during H4, rejects this claim,
arguing that "the Third Life Directive does not refer to an individual called an Appointed
Actuary. The question of whether an Appointed Actuary could take on that particular role is
therefore not a matter for that Third Life Directive. It was a common arrangement with a
number of other life insurance companies that the Appointed Actuary played that sort of role
within the UK system."
14. Penrose detects general failings as regard prudential supervision of ELAS
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The Penrose report (WE 16) detects general failings as regard prudential supervision of
ELAS: "Regulation, and GAD's advice, were focused exclusively on the solvency margin over
contractual liabilities and took no account of accrued terminal or final bonus,
notwithstanding that at the date of the 1989 report exposure to falling markets was real and
was known to GAD and the regulators."(Ch.16-16). "The Society... was too venerable to be
of real concern, and lack of information provided grounds for inaction ... Regulators had
been given an insight into the Society's practice that might reasonably have alerted them to a
need for monitoring of current and future practice. No special steps were taken to put in place
a suitable system." (Ch.16-21)
Supporting these ideas, WE Conf 3 claims UK regulators did not deal with ELAS' problems
when serious difficulties within the organisation were known before 1997 and possibly even
as early as 1991. They did not realise that there were insufficient funds to cover policyholders
with GARs.
15. PRE protected by UK law
Mr. LAKE in H1 claims that "in UK law the 'reasonable expectations of the policyholders or
potential policyholders' (PRE) have the protection of the competent authorities".
Mr HOLMES's (WE 84) evidence supports this thesis: "The protection of PRE under UK law
was of great importance because of the shift in the 1980's and 1990's in the balance of
benefits provided by ELAS under its policies away from guaranteed benefits to un-guaranteed
terminal (later final) bonus. [...] Whereas guaranteed benefits qualified as 'liabilities' under
national an Community law, and therefore had to be reserved for, the only protection
accorded to unallocated terminal or final bonus under the UK regulatory scheme was the
obligation to consider whether to intervene in order to protect the reasonable expectations
raised in relation to such bonus".
16. PRE were created by ELAS' practice
On the issue of PRE, Penrose (WE 16) states that he was told by the UK regulators that PRE
in respect of terminal bonuses were not created by the society's bonus practice. Instead he
argues in the opposite direction, stating that PRE did arise by reason of the Society's terminal
bonus practice (in other words, that policyholders had reasonably expectations that they were
entitled or would receive discretionary bonuses in addition to contractual benefits).
Paragraph 220, chapter 18, WE 16, states: "GAD and the Treasury have told the inquiry that
the relevance of terminal bonus was always recognised by GAD and the regulators, but that
PRE in respect of terminal bonus was not created by the Society's bonus practice. They point
to the notes that stated that terminal bonus was not guaranteed. However, GAD and the
Treasury also recognise that PRE was not restricted to guaranteed benefits. It is not
necessary to conclude that policyholders would have reasonable expectations of receiving a
precise amount of bonus to take the view that reasonable expectations would still have been
created. The point is highlighted in GAD's own representations: “It was generally accepted in
the life insurance market that past levels of terminal bonus did not create reasonable
expectations for the future, as they would be entirely dependent on market conditions, subject
to a degree of smoothing, which varied considerably from company to company.” The
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reasonable expectation would not be that the precise policy value quoted would be payable,
regardless of market conditions or smoothing, but that any reduction would reflect adverse
market conditions. A position where the Society could not afford to honour the policy values
without rising market values or inter-generational transfers would not have been understood
by the Society's policyholders on the information provided to them, and would not have
informed their reasonable expectations."
17. Effective control in the hands of the life assurance industry
"The Investors' association concludes that the UK prudential system was designed to give the
appearance of proper regulation but it left effective control in the hands of the life assurance
industry", is the conclusion drawn by Mr JOSEPHS in H2. He asked EQUI to examine
"whether such a consistent pattern of concealment and misdirection is or should be
compatible with the regulatory regime implicit in the EC Life Directives."
18. FSA not industry-led
Referring to allegations that the FSA is ‘industry-led’ as well as industry-funded and that the
FSA is ‘facing the way of the industry’, Mr. McELWEE in H3 believes that this is not a fair
characterisation. According to him, “the FSA has got four statutory objectives: market
confidence, public awareness, consumer protection and the reduction of financial crime.
Under statute, the FSA must, as far as possible, act in a way that is compatible with those
objectives. Of these at least three appear to me to be consumer-facing and one, the
maintenance of market confidence, at least neutral as between consumer and practitioner. At
a higher level, of course, even this is ultimately to the benefit of consumers, to the extent that
it benefits market participants. Those benefits are also ultimately passed on to consumers.”
The same message was put across by David STRACHAN from the FSA in H4, explaining
that "the FSA is independent of the UK Government. Nor is it funded through general
taxation. Rather, we are funded entirely through our power to levy fees on the firms we
regulate or which use the UK’s stock markets and exchanges. [...] We are a statutory
regulator established by Parliament; we are not a self regulatory body or a trade association
with voluntary membership. [...] Regulated firms across all financial sectors must pay for the
costs of regulation."
Article 10 – Supervisory powers & accounting returns
19. ELAS became a Ponzi fund
Mr. LAKE also believes that "the failures by the UK Government and regulatory authorities
allowed ELAS' with-profits fund to become a “Ponzi fund” in which attractive payouts were
subsidised from growing investments by new and existing policyholders" (H1). He claims that
retention of funds to meet expected payouts was protected by law but UK authorities failed in
their duty to enforce the law.
Mr SEYMOUR in H7 is of the same view: "the UK regulator could easily have determined
the existence of a pyramid scheme, together with the absence of reserves – as did Penrose and
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Burgess and Hodgson – and taken remedial action as required by the Directive. This was
essential, particularly as the declared presence of a reserve fund was a key selling point
throughout the Community."
20. Over-reliance on 'light touch' approach
M. LAKE claims in H1 that those implementation failures cover the powers to deal with
prejudices to policy-holders, inadequacy of regulatory returns, inadequate resources,
unworkable divisions of responsibility in respect of regulation of consumer information "and
over-reliance on industry-led agencies and the traditional “light touch” approach". He
claims that this approach made the UK reluctant to adopt the aim of the life directives and
thus failed in their implementation as well as in their execution.
Mr SEYMOUR in H7 corroborates this view: on the Directives’ requirement for supervision,
"the word ‘shall’ is mentioned all over the place. It is not ‘may’, but ‘shall’. The only
interpretation that has been quoted for UK regulation is ‘light touch’ – which I call ‘head in
the sand’ regulation." He recalls the numerous unregulated practices within ELAS, including
"such horrors as a reinsurance contract which on examination was worthless, and a company
actuary who was engaged to represent policyholders’ rights while he was in fact the chief
executive of the company’s business". Nevertheless, he states that he does not believe in heavy
regulation but "that a policyholder should be given clear and accurate information regarding
their policy. It is in the directives; it is totally reasonable. It is also totally reasonable that the
regulator who has to supervise and know thoroughly what was happening to an insurance
business, whose head office was in his territory, does just that, and makes sure that people
are not given wrong information and that the company is not able to run its business contrary
to its sales material."
21. The Society's returns did not meet the directive's requirements
On the accounting returns, Penrose (WE 16) says that "so long as there is a regulatory
solvency test prescribed under European Directives, there will be a need for financial
statements that meet the regulatory requirements developed for that purpose. Under the
historic regime these statements have been impenetrably mysterious, over-complex, overwordy, and detailed to the point that overall substantial effect has been buried. The Society's
returns were so convoluted that material information escaped notice of regulators and their
advisers in GAD."
This lack of clarity of the returns could contravene the requirements of Article 10, which
requires of the UK regulator that it make detailed enquiries and require the submission of
documents or carry out on-the-spot investigations. Other evidence seems to suggest that the
regulators were always excessively respectful and even fearful of the ELAS management.
Penrose has more to say on returns: "The scrutiny reports on Equitable's regulatory returns
from the mid to late 1980s were relatively brief, terse documents, normally running to a page
or a page and a half. They were prepared by GAD ... The scrutiny reports would record a few
headline figures, the amount of new business written, the movement in mathematical reserves
and the cover for the required minimum margin (RMM) of assets over liabilities." (Ch.16-1.)
The Society's cover for the RMM was clearly a key index ... dropping through the mid to late
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1980s, from 8.5x in 1984 to 3.8x in the 1988 returns. In the absence of the correspondence
files, it is not possible to say exactly what doubts may have existed over the returns, or how
the downwards trend in cover for RMM was regarded, but it would not appear to have been
an issue of any great concern to regulators." (Ch.16-3). "There are no DTI correspondence
files dealing with Equitable for the period prior to 1991. A group of earlier files was
destroyed ... in 1998 while the regulatory return files were still available (1987 and 1988
missing) back to 1981." (Ch.15-46,47,53).
22. Article 10 of the 3LD not respected: under-resourcing and non-respect of PRE
Mr. LAKE in H1 claims that the "insurance regulators were seriously under-resourced
throughout the 1990s", contravening Article 23(3) of the 1LD as amended by the 3LD
(Article 10). He then goes onto argue that Article 23(3)(b) of the 1LD as amended by the 3LD
(Article 10) requires that the powers and means be sufficient to allow the competent
authorities to be able to prevent or remedy any irregularities prejudicial to the interests of the
policyholders, which was not done in this case.
The Baird Report (WE 17) also gives support to the idea that insurance regulators were underresourced during the crucial years when the ELAS crisis developed. It refers to the breakdown
of staff involved in the insurance regulation on 1 January 1999: “...the total number of staff
involved in the prudential regulation of approximately 200 insurance companies (…) was less
than 135. By way of comparison, there were approximately 135 staff involved in the
regulation of 400 authorised UK banks, building societies and UK branches of non-EU
institutions” (paragraph 2.23.5).
Mr. HOLMES (WE 84) also gives credence to the Baird report when criticizing the lack of
means available to regulators during the 1990’s. In addition, he states that “even allowing for
the discretion which Member States possess in deciding upon an appropriate level of
regulatory resources, it must be open to doubt whether the UK provided its competent
authorities with the means necessary for supervision, the standard explicitly laid down in the
Community legislation since November 1992. On the one hand, it must be asked whether in
numerical terms sufficient staff were devoted to the task. On the other hand, it must also be
asked whether the personnel that were available were appropriately qualified to provide
supervision which was effective.”
Mr. LAKE, also in H1, argues that Articles 23(1), 23(2) and 23(3) of the 1LD as amended by
the 3LD (Article 10) require annual accounts and the periodical returns, together with
statistical documents, necessary for the purposes of supervision, which must enable the
competent authorities to take any measures that are appropriate and necessary to ensure that
the undertaking's business continues to comply with the laws in each Member State, including
the home Member State. Mr. LAKE also claims that the UK simply did not implement the
legal requirements to enable the authorities to monitor the application of its own law in
respect of PRE, despite its being appropriate and necessary, and thus breaching Community
law.
23. Adequacy of UK regulatory regime, differing views
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Contrary to other witnesses, Charles THOMSON, current CEO of ELAS states in H2 that "for
many years the Regulators in the UK had very extensive powers to raise questions with
companies and considerable powers to intervene in exceptional cases. Specifically, the
Secretary of State had the power to intervene if the reasonable expectations of policyholders
or prospective policyholders were not being met. In short, my view is that the relevant
regulators in the UK both before and after the changes made as a consequence of the
consolidated life directive had sufficient powers to regulate effectively."
Mr Clive MAXWELL from HMT in H4 acknowledges the fact that there were "problems
with the regulatory system in place at the time. It is not that individual directives – the Third
Life Directive, for example – were not transposed properly; rather, with the benefit of
hindsight, the system in place was not modernised: it was not necessarily the optimum system
to be in place."
24. Under-resourcing of regulators not necessarily means UK approach was inappropriate
Article 10 of the 3LD states that competent authorities must have ‘the power and the means to
take any measures to prevent or remedy any irregularities prejudicial to the interests of the
assured persons’. Mr MCELWEE believes, referring to Lord Penrose’s findings, that UK
“regulators were not (…) in some periods well-funded.” Therefore they did not have the
‘means’ to fully fulfil their duties. “As a result, I think the committee would do well perhaps
to be cautious in reaching a conclusion that, because a different approach was taken in
different Member States, that the UK’s approach was not appropriate.” This view was
supported by Clive MAXWELL in H4, who, when commenting on resourcing issues of the
regulators, says that "in his report, Lord Penrose draws attention to some issues such as the
resourcing of certain aspects of the regulatory system in place at various points in time.
However, I think it is fair to say that his comments were made with the benefit of hindsight
and in many ways reflected his own views about the need for a stronger form of regulation.
[...] So those sorts of comments about resourcing need to be seen in that light".
Article 18 – Technical provisions; Article 25 – Solvency margin
25. UK system not respecting intention of the Directive
Mr JOSEPHS (H2) believes that the intention of the Directive was that contracts of insurance
should be very carefully valued to compute the liabilities. This should be based on the precise
wording of each class of contract. Mr JOSEPHS believes that "the UK system was not doing
that at all, judging by the evidence of the amount of time given to various things - i.e., what
the regulator's staff saw, what they did and so on".
26. Articles 18 and 25 of 3LD not respected? Different ways to calculate solvency
Mr. JOSEPHS, in H2, also reinforces this view by claiming that Article 18 of the 3LD on
technical provisions was not respected given that "Equitable insisted on treating all policies
alike, whether they were written as ‘defined benefit’ contracts, or in the later form as
‘investment’ contracts." The contracts "were written so as to give their holders the absolute
right to share in the investment return of the Society pro rata to net premiums paid."
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Article 18 makes it an obligation that this right be reflected in the calculated liabilities for
those policies, which, according to Mr. JOSEPHS, was not the case. He concludes that it
"enabled the continued transfer of assets from holders of the newer policies to the favoured
cohorts."
However, Christopher DAYKIN, Government Actuary, Head of GAD, claims in H4 that "as
regards the reserving basis, Equitable Life adopted a gross premium reserving approach,
which was different to the approach used by most other companies but it had to demonstrate
the equivalence of what it was doing to the net premium reserve requirement. It always
succeeded in doing that satisfactorily. So its reserves – at least up until 1998 – were always in
line with the requirements of the regulations."
Article 25 on the minimum solvency requirement requires a company to have an excess of
assets over liabilities, at least equivalent to the solvency margin requirement. However, it
seems there are different ways of calculating solvency. David STRACHAN, FSA tries to
clarify the issue in H4 by saying that "Equitable has always been solvent and in its regulatory
returns it has always reported that it is currently meeting its regulatory solvency
requirements. There are, in fact, at least three different bases that are used: the approach
Chris Daykin has described which characterised the regime for much of the 1990s and was
consistent with the Third Life Directive; there is a basis of calculation which was produced by
Lord Penrose in his report that was based on figures produced by Equitable for its own
purposes – those figures were not provided to the regulator; the third basis, which is the
current basis, is the FSA’s new realistic solvency requirements".
However, answering a Member's question during H5, Stuart BAYLISS, Managing Director of
Annuity Direct, says that the UK regulators "had been buying Equitable’s story on solvency
margins for a very long time. It goes back to that illustration on new sales: as long as you are
generating new sales to cope with it, then you are OK. If your new business is big enough,
you can backfill the hole. That is what they were doing and, to a certain extent, some of the
regulators presumably must have seen that. I cannot imagine that they could not have done,
because it was something that the growth pattern of the company required them to keep
growing".
Alan BEVERLY, from the Commission, also builds on this point in H6, with reference to
insurance guarantee schemes: "the point on the Equitable Life case is that Equitable Life did
not become insolvent, it did not fail. Therefore, even the existing compensation scheme – the
insurance guarantee scheme in the UK – did not come into play in the case of Equitable Life.
[...] Therefore, even if there had been a directive at European level setting up a harmonised
insurance guarantee scheme system, it is far from clear that would have been relevant in the
case of Equitable Life because there was no insolvency or failure as such".
27. Persistent asset shortfall due to poor reserving
On the issue of Article 18 on Technical provisions, WE 79 (Paper by Investors Association on
asset shortfall) gives useful insight into what it claims were the causes for ELAS' situation.
The paper states that "the key weakness in the prudential regime as operated in the UK was
that it made no provision for paying future investment returns to the people who were entitled
to those returns, namely the policyholders of ‘investment policies’. The rules were
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deliberately left vague with the decision on provision for future bonuses left at the whim of the
Actuary. However the consequences of not making such provisions were not vague at all,
since in the absence of those provisions the with-profits fund would almost certainly fail."
The report is of the opinion that the overarching problem at ELAS was a massive shortage of
assets, as measured against the realistic liabilities. This asset shortage persisted from 1985 at
the latest, up until the point when Equitable closed to new business at the end of 2000. It was
made up of the following elements:
"A) Failure to allow properly for future guaranteed bonuses to which holders of investment
policies were contractually entitled;
B) Failure to make proper provision for guarantees in the contracts (such as the notorious
GARs);
C) Failure to make any visible provision for non-guaranteed bonuses already allotted;
D) An excessively liberal and self-serving interpretation of the Statutory Rules (and possibly
the Professional Guidance)."
The report concludes that, throughout the period 1990 to 2000, there was a persistent asset
shortage ranging from around £5 billion to around £7 billion excluding "any provision for the
‘Final Bonuses’, which it was claimed were ‘non-guaranteed’, despite the fact that
policyholders had been led to expect that those bonuses would also be paid, depending only
on the state of the markets at the time of leaving the Fund. In effect, the whole of final bonus
was uncovered by any assets throughout the period in question. [...] The sums in question
were substantial, and we estimate them to have increased from around £3 billion in 1990 to
£11 billion in 2000, averaging about 45% of assets over the 11 years in question."
28. No reserves for terminal bonuses: choice of option in UK law was detrimental
Nicholas BELLORD states in H2 that "when it came to the third life directive being drafted, it
was found that stricter reserving requirements were being proposed, and the UK delegation
was supporting these stricter requirements. However, the Treasury, the regulators, realised
that if this directive went ahead as drafted, it might reveal the truth about Equitable and
therefore they scotched the idea by making the reserving optional (…). So the option existed
to have proper reserving but the UK regulators deliberately did not take advantage of that
option."
In this regard, WE Conf 11 also claims that the 3LD, as adopted, had a major flaw, namely
the abovementioned fact that allowance of future bonuses was made optional in the final
version of the text (see also the section on Article 18 of the 3LD). WE Conf-11 claims this
was done under pressure from the UK throughout the negotiations to adopt the directive. As
has been explained elsewhere, the UK did indeed subsequently opt out of this provision. WEConf 11 explains how this in turn made it legal for ELAS not to make allowances for terminal
bonuses, which was one of the reasons why the company did not have enough assets when the
House of Lords forced them to pay GAR policyholders their promised bonuses.
WE 26 (Burgess Hodgson report for EMAG) also explains how no reserves were put aside for
terminal bonuses and the consequences thereof. It explains how the accounting figures
supplied to the Regulator by ELAS did not include any provision for terminal bonuses. The
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figures were enough to cover the required minimum margin for statutory reporting purposes
(from 1994 to 1999, the margin averaged around 7%). However, the report claims that "it
must have been clear to the Regulator, as an actuarial expert, that it could not possibly be
enough to cover terminal bonuses. He might reasonably have estimated that for this purpose
the margin would need to be nearer 20%. In short, the Regulator must be asked whether he
knew (or should have known) that Equitable Life’s assets did not cover the Director’s bonus
declarations in any year after 1993. The Regulator would have known that terminal bonuses
were used: a) to indicate policy values to members; b) to make payments on maturity or
surrender; c) to encourage new policy sales through statements of past performance. Whilst
he would be aware that from 1998 onwards the contractual liabilities included a provision for
GAR cost, he would also have known that its effect was greatly reduced by the rather
uncertain value of the reassurance policy with Irish European Reinsurance Company
Limited."
Penrose (WE 16) also supports the idea that prudent reserving would have exposed ELAS'
weaknesses. He claims that the UK Regulator was focused exclusively on solvency margins
and took no account of accrued terminal bonus, possibly breaching Article 18, which requires
that supervision include verification of a company's entire business and not just its state of
solvency.
Penrose says that the directive "required prudent reserving for, or some realistic account to
be taken of, final bonus. This would have exposed the weakness of the Society at a much
earlier stage and would have prompted corrective action. DTI did not take that opportunity,
taking the view instead that “some appropriate allowance should be made implicitly in the
parameters of the system”. The UK regulations implementing the directive left the position as
it had been previously." Penrose also criticises the regulator’s lack of a "pro-active
approach".
29. Use of future profits to fulfil solvency margin not in line with Article 25
Mr. SEYMOUR claims in H7 that when the UK Regulator saw the extent of the problems at
ELAS and discussions on the use of the insurance rescue fund started, the UK Regulator
panicked (as this would have entailed a tax or levy on all other insurance companies to
compensate ELAS policyholders) and to avoid this situation it "then approved a system of
including five years of theoretical future profits to balance the books of a closed company –
ELAS, thus rendering impossible access to the compensation fund." He says this "makes
nonsense of the whole concept of solvency".
In WE 54 (‘La Vie d’Or’, Case 98/2863 at the District Court of The Hague, date of
pronouncement 13 June 2001), Mr. SEYMOUR (H7) explains how the plaintiff claims that
"the inclusion of future profits in the balance sheet did not give a true picture of the assurance
company’s solvency and was therefore contrary to the EU Life Directives. [...] It is important
to note that the issue of the legality of future profits in terms of the EU Life Directives was
raised."
The Baird report's (WE 17) investigation into the issue of future profits also deserves close
scrutiny. Quoting exchanges with the GAD, it says that "EU directives and UK legislation
permit a value to be placed on the future profits of an insurance company. This is referred to
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as a “future profits implicit item”. (...) GAD explained to us the background to such items:
“The background legislation…stems from the European Directives, particularly the First Life
Directive going back to 1979. This says that at the discretion of the supervisory authority, the
company may be allowed to count such items against 5/6ths of its margin of solvency, to its
future profits calculation. The future profits calculation is then specified in the same Directive
as being, in effect, 50% of the average profits earned over the last five years multiplied by the
expected duration of the policy in force. The Directive just said that the supervisor could
exercise their discretion, and it may be allowed as a solvency margin."
This optionality was severely restricted with the adoption in 2002 of the Solvency I Directive
(Article 1(4)), which totally prohibits this practice from 2009 onwards. Baird explains how
ELAS requested and successfully obtained authorisation from the regulator on numerous
occasions to use future profits to meet its solvency requirements. The regulator used his
prerogatives under section 68 of the ICA 1982 to grant the repeated authorizations. This,
according to Baird, allowed the company to enhance the external perception of its financial
strength. Baird recommended reviewing the exercise of discretion by the regulator in relation
to authorisations for using future profits to meet solvency requirements.
This is closely linked to one of the lines of investigation being pursued in terms of correct
transposition of the 3LD. The issue is whether the discretion exercised by the Secretary of
State based on section 68 of the ICA 1982 played a prominent role in the ELAS affair, as is
claimed by Baird. What needs to be evaluated in this context is whether the discretion itself is
compatible with the 3LD. The Directive prescribes that Member States must ensure that
competent authorities have sufficient powers and means to carry out their supervisory
functions (see Article 10 3LD). The Directive, by contrast, allows the competent authority to
waive the application of rules only on a limited number of occasions and subject to stringent
conditions (see Articles 21(2) 3LD and 22(6) 3LD) but it seems that nowhere in the Directive
is the competent authority of a Member State entrusted with waiver powers as those
prescribed by section 68 of the ICA 1982. It seems that such powers entail the risk of being
exercised in a lenient way, or in an inconsistent way that might have been beneficial to some
companies but not to others, thereby possibly undermining the application of harmonised
standards. It is possible that, if those powers had been somehow constrained, the ELAS
collapse would have been avoided or at least minimized.
Article 28 – General good; Article 31 – Information to policyholders
30. C.O.B/prudential separation was prejudicial
On issues regarding communication with the policyholder, Mr. LAKE says (H1) that the
policyholder information required by the 3LD came under the control of the conduct of
business regulator which was separate from the prudential regulator, and that this legal
division of responsibilities between prudential was prejudicial to ELAS policyholders.
Finally, on implementation cases brought to UK court proceedings he says that he knows of
none which relate to non-implementation of the EU Law.
However, David STRACHAN from the FSA presented a different view in H4, claiming that
"the Third Life Directive has been implemented in a way that has ensured clarity as to the
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respective responsibilities of the home and host regulators [...]. Consistent with the Third Life
Directive, it falls to the regulator of those branches – the host regulator in this case – to apply
its own rules. This avoids an otherwise confusing situation in which policyholders would be
subject to different conduct of business protections depending on whether they were doing
business with a domestic institution or a branch of an EEA institution."
31. Annex II not respected
Leslie SEYMOUR in H7 provides written evidence (WE 53) claiming that Annex II of the
3LD – renumbered Annex IV in the CD –, which requires that the policyholder be given
information regarding his policy ‘clearly’ and ‘accurately’, was not respected. WE 53 shows
ELAS sales documents explaining the superior performance of ELAS pension funds and
claiming that ELAS was able to provide superior performance due to its lower running costs.
It also claimed to have superior investment management. Another document explains how
ELAS proceeded with 'smoothing', by holding reserves, and that each year the policyholder
would receive a bonus, with a certain amount of money that the company had made being
retained to cover any future downturns in the stock markets or in the investments they had.
Mr SEYMOUR claims that all these promises were false and therefore the information was
not clear and accurate.
Mr SEYMOUR says that "the Directive requires that policyholders receive regular, clear and
accurate information about the insurance undertaking. The regulator did nothing to ensure
that this vital part of the Directive was put into effect."
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Conclusions PART II, TRANSPOSITION
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PART II - TRANSPOSITION
Transposition of the Third Life Directive (3LD)
1.
Despite having identified some discrepancies between specific domestic UK regulations
and articles of the 3LD1, the committee considers that the nature and number of such
discrepancies is not important enough to characterize what may be termed as the formal
transposition process as defective.
2.
The committee makes one exception, nevertheless, as regards the ample powers domestic
UK legislation bestows on the Secretary of State (as prescribed by Section 68 of the ICA
1982) to waive the application of prudential regulations. These powers appear to be
incompatible with the letter and the aim of the Directive and were used inappropriately2
(particularly when granting authorization on numerous occasions to include future profits
in the solvency margin), and that therefore, in this particular instance, there are serious
concerns that the 3LD was not correctly transposed in full.
3.
The committee believes that the transposition of the 3LD by the UK, was not carried out
in a way which allowed the effective fulfilment of its underlying objectives. The
committee believes that the UK technique of implementing the Directive in a piecemeal
fashion (i.e., the directive was transposed not into one single national law but spread
throughout different acts of varying hierarchy) lacks clarity and does not seem to be the
best way of incorporating EC principles and standards into domestic legislation.
Application of the 3LD
4.
The committee considers it clear that the obligations imposed by Directives on Member
States do not only concern their legislative competences but extend also to their
administrative and judicial competences. Furthermore, the adoption of national measures
implementing a Directive does not exhaust its effects. Full application of a Directive is
only secured when national implementing measures are actually being applied in such a
way as to achieve the result sought by it. Indeed, divergences in the application of
Directives would otherwise have a negative effect on uniformity and equivalence within
the Community legal order.
5.
The committee is of the opinion that the application of the 3LD by the UK in respect of
the ELAS case was deficient and that UK regulators and authorities did not adequately
respect the ultimate purpose of the Directive. The committee believes that, in the present
case, the combination of a formalistic transposition with an application which was
defective in several respects leads to the conclusion that the implementation process as a
whole was flawed.
Specific issues regarding application
1
2
See Part II, sections II.2.1, Part II, section II.2.2; Part II, section II.2.3; and WE 20.
See Part II, Section II.1.1. on Art.25 3LD; see also WE 17, para. 7.2.2 at p. 228.
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The concept of financial supervision of the entire business
6.
The committee recalls that the Directive states that financial supervision must cover the
“assurance undertaking's entire business”.1 The committee stresses as a legislator that
such simple terminology is unambiguous and must be given a wide and proper
interpretation.
7.
The committee believes that UK authorities’ supervision of ELAS disregarded or
misinterpreted the concept of "financial supervision of the entire business" contrary to
Articles 82, 183 and 254 of the 3LD.
8.
The committee believes that the option contained in paragraph 1.D of Article 18 of the
3LD does not exclude future discretionary or non-contractual bonuses from being an
integral part of the company's ‘entire business’ and does not exonerate Member State
authorities from doing their utmost to respect the letter and the aim of the Directive.
Furthermore, it appears from the material available to the committee5 that one of the main
reasons for ELAS’ financial downfall was the fact that, throughout the years, it did not
properly reserve for future discretionary or non-contractual bonuses.
9.
It has been argued that ELAS was not obliged to reserve for future discretionary or noncontractual bonuses because this was optional under the Directive, and the UK regulator
decided not to avail itself of this option. The committee believes that the fact of making
the reserving of discretionary bonuses optional undermined the strength and internal
coherence of the Directive. Although the UK regulatory authorities were entitled to
introduce such an option, it could be argued that this was inconsistent with the overall
aim of the Directive.
10. Submissions made to the committee6 suggest that the regulator tended to focus on
solvency margins in a narrow sense and took little or no account of future discretionary
and non-contractual bonuses in its overall analysis of the financial health of the company.
The committee believes therefore that it is likely that the regulator did not manage to
guarantee that ELAS had an adequate solvency margin in respect of its entire business at
all times.
Lack of sound administrative and accounting procedures and adequate internal control
mechanisms
11. There are clear indications that the UK regulators knowingly failed to challenge the dual,
and therefore conflicting, role of the Appointed Actuary of ELAS, who for six years also
held a leading management post in the Society as its Chief Executive. The committee
believes that this duality of roles created a conflict of interests detrimental to
1
Article 8 3LD.
See Part II, Sections II.1.1 and Part II, section II.2.3; see also WE 16 (Ch. 16; ch. 19, para. 210; ch. 18, para.220; ch. 21)
and WE Conf 3.
3 See Part II Section II.1.1 and Part II Section II.2.3; see also WE Conf 11, WE 16, WE 26 and WE 79.
4 See Part II Section II.1.1 and Part II Section II.2.3; see also WE 17.
5 See Part Section II.2.3, see also WE 16, WE 26 and WE 79.
6 See WE 16, ch. 19, para 210.
2
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policyholders' interests which should have been challenged by regulators as an instance
of bad corporate governance. Furthermore, the committee believes that, by not taking
swift action on the issue of the double role of the Appointed Actuary, the UK regulator
did not fulfil its obligation to require from ELAS "sound administrative and accounting
procedures and adequate internal control mechanisms" as required explicitly by the 3LD,
and contrary to Article 8.1 The committee insists that the role of the Appointed Actuary
was central to the UK supervisory system, and that a failure to guarantee the effectiveness
of such a figure undermined the whole system of supervision, in particular rendering any
internal controls completely inadequate. The committee considers that, once in place and
irrespective of whether the concept was required under Community law, the Appointed
Actuary became part of the UK regulatory and supervisory system which, as a whole,
was subject to the 3LD. Furthermore, certain statements2 lead the committee to believe
that this failure formed part of a wider administrative practice which undermined the
effectiveness of the safeguards contained in Community legislation.
Failure to respect policyholders’ reasonable expectations (PRE)
12. According to some statements made to the committee3, the concept of PRE included the
fact that policyholders expected to receive discretionary bonuses in addition to
contractual benefits. If UK authorities were obliged to respect PRE as part of their
obligations under Community law, the committee considers that they should have also
made sure that reserves covered discretionary bonuses. The committee believes that, by
not considering discretionary bonuses as an integral part of the company’s entire business
and not obliging ELAS to provide adequate technical provisions for them, the UK
regulators did not pay due regard to PRE and thereby appear to have breached the letter
and aim of Article 18 of the 3LD.
13. The committee recalls that Article 10 of the 3LD required that UK authorities be given
the powers and means to ensure that PRE were respected and that any appropriate and
necessary measures were taken to ensure that ELAS' business continued to comply with
UK law4, in order to prevent or remedy any irregularities prejudicial to the interests of the
assured persons.
14. Statements made to the committee5 suggest that, during the 1990s, the regulators in the
UK did not exercise their extensive powers with respect to ELAS, despite having
sufficient indication of the impending crisis. Some accounts6 indicate that the regulator
adopted a conscious and deliberate hands-off approach with regards to the ELAS case.
The committee believes that this may have constituted a breach of the regulators’
obligation to ensure respect of PRE and therefore was in breach of the letter and aim of
Article 10 of the 3LD.
UK regulators' excessive leniency on solvency margin
1
See Part II Section II.1.1 and Part II Section II.2.3.
See Baird Report (WE 17), paragraph 2.13.6.
3 See Part II Section II.1.1; see also Part II Section II.2.3; see also WE 16, ch.18, para 220, and WE 26, WE 52-54 and
LLOYD in H5.
4 See Part II Section II.1.1.
5 See Part II Sections II.1.1 and Part II Section II.2.3; see also WE 17.
6 See Part II Section II.2.3 and WE 16.
2
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15. Several statements1 support the conclusion that ELAS artificially enhanced the external
perception of its financial strength and managed to meet its solvency requirements by
successfully obtaining numerous authorisations from the regulator to include future
profits and zillmerising as part of its implicit assets. These authorisations were granted on
the basis of the waiver powers of the Secretary of State contained in Section 68 of the
ICA 1982, whose compatibility with the letter and the purpose of the 3LD remain
doubtful to the committee. The UK regulators' excessive leniency in this regard appears
to have been in breach of Articles 10 and 25 of the 3LD.
16. The committee believes that by being allowed to artificially meet its solvency
requirements, ELAS hid the truth from policyholders and endangered its future financial
viability. It therefore follows that PRE were put at risk and that UK regulators allegedly
took measures that were not “appropriate and necessary to prevent or remedy any
irregularities prejudicial to the interests of the assured persons”2.
17. The committee believes that excessive use of future profits and zillmerising rendered the
solvency margin relatively misleading as an indicator of the financial health of ELAS and
that as a result the UK regulators did not fulfil their obligation to require from ELAS an
“adequate available solvency margin in respect of its entire business at all times”.
18. A large quantity of material3 indicates that, particularly in the early 1990s, the UK
supervisory and regulatory bodies were not adequately equipped with appropriate means,
either by way of competent staff or sufficient resources, to fulfil their supervisory and
regulatory duties, contrary to the standard set out in Article 10 paragraph 3 of the 3LD.
Such necessary powers and means and the consequent possibility of effective supervision
are all the more important since, with the coming into force of the 3LD, the home
Member State retains the sole responsibility for the financial supervision of life assurance
undertakings.
Information requirements
19. Material available to the committee4 raises concerns as to whether the disclosure
requirements laid down in the 3LD were properly implemented by the UK and whether
they were breached in the case of Equitable Life.
1
See Part II Section II.1.1 and Part II Section II.2.3; see also WE 17, para 7.2.2, p 228.
Article 10 3LD.
3 See for instance: Baird Report (WE 17), at paragraph 2.23.5; Penrose Report (WE 16), Chapter 19, at paragraphs 158 and
160.
4 See Section IV.
2
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PART III - REGULATORY
SYSTEM
on the Assessment of the UK regulatory regime in respect of Equitable Life
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INDEX PART III
I.
Community Law Provisions
1. Applicability of Third Life Directive provisions
2. Prudential supervision responsibility
3. Conduct of Business supervision responsibility
4. Assessment of companies' financial situation
5. Implementation of supervisory measures
6. Supervision of foreign-based companies
7. Supervision of accounting and financial situation
8. Supervision of companies in difficulty
9. The European Commission and the Equitable Life case
10. CEIOPS and the Siena Protocol
11. The Solvency II project
12. Questions to be answered
II.
The UK Life Insurance Regulatory System
1. Application of Third Life Directive provisions
2. Prudential supervision
a) Period 1982-1998
b) Period 1998-2001
c) Period post-2001
3. Conduct of business regulation
4. The Appointed Actuary
5. Regulators' Intervention Powers
6. Regulators' Liability
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III.
Key findings of the Penrose and Baird reports on Life Insurance Regulators
1. The Baird Report (October 2001)
2. The Penrose Report (March 2004)
2.1 Definition of prudential supervision
2.2 Intervention powers by regulators
2.3 Interaction of regulators
2.4 The unchallenged double role of Mr. Ranson
2.5 Alleged regulator shortcomings in general
a) Lack of knowledge and/or weak monitoring
b) Complacency or "easy hand" policy by regulators
c) Negligence by regulators
2.6 Timeline of acknowledgement by regulators of concerns about EL
2.7 The Penrose Report's conclusions
IV.
Other Oral and Written Evidence considered by the Committee
1. Alleged negligence in prudential regulation and supervision
a) Claims of operational shortcomings by UK regulators
b) Alleged obstruction by UK regulators and collusion with EL
c) Claims of Regulators' industry bias
d) Claims of Regulators' 'light touch' regulatory policy
e) Claims of Regulators' excessive 'deference' to EL
f) Claims of Regulators' drive to avoid EL's insolvency
g) Double role of EL Chief Executive and Appointed Actuary
h) Adequacy of resources available to regulators
2. The GAR Problem
a) Timeline
b) Background information
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c) Claims of regulators' incompetence in failing to recognize GAR risk
3. Alleged Unfairness in the 2001 'Compromise Scheme'
a) Timeline
b) The independent actuary's report
c) The Compromise terms in detail
d) FSA's role in 'Compromise Scheme'
e) Complaints by policyholders
f) Claims of EL management not qualifying as 'fit and proper'
4. Alleged negligence in Conduct of Business (CoB) supervision
a) Allegations of mis-selling and misrepresentation in the UK
b) Allegations of mis-selling in other Member States
c) Allegations of 'churning' policyholders' contracts
d) Claims of communication failure between UK regulators
e) Communications between UK and foreign regulators
f) Misleading advertising on the German and Irish market
Conclusions
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Introduction
Responding to indent 3 of the mandate, the Committee of Inquiry proceeded to analyse the
role and effectiveness of the Insurance Regulators in the UK and other Member States
concerned, endeavouring to assess whether or not there has been consistent regulatory failure
in the supervision of the life assurance sector in general and in the supervision of Equitable
Life's business practices and financial standing in particular. The committee also analyzed
allegations of regulatory failure in the protection of policyholders and consumers due to
incorrect implementation of the Third Life Directive1, assessing in particular how the UK
regulatory system compared when judged against its peers in an EU environment.
The findings of the Penrose report2 and the Baird report3, whose investigations overlap with
parts of the committee's mandate, were taken as a starting point but considered in a wider
European context4.
I.
Community Law Provisions
The role and responsibility of life insurance regulators with regard to the supervision of
assurance undertakings is codified in Articles 8 to 10 of the Third Life Directive (3LD)5
amending Articles 15, 16 and 23 of the First Life Directive (1LD)6.
Rules relating to technical provisions and their representation by assurance undertakings
1
Directive 92/96/EEC of 10 November 1992, in OJ L 360 of 9.12.1992.
The Treasury set up Lord Penrose’s inquiry in August 2001. The terms of reference were: “To enquire into the
circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life
market background; to identify any lessons to be learnt for the conduct, administration and regulation of life
assurance business; and to give a report thereon to Treasury Ministers.” The Penrose report was published on 8
March 2004.
2
3
The Baird Report, "The Regulation of Equitable Life: an independent report" prepared by Ronnie Baird, Director,
Quality Assurance and Internal Audit, FSA, assisted by Norton Rose and PricewaterhouseCoopers, was published by
the Treasury on 17 October 2001.
4
An ongoing investigation by the UK Parliamentary and Health Service Ombudsman (PO) should also
determine whether the relevant UK regulatory regime was properly administered. The first report by the UK
Parliamentary Ombudsman, published in June 2003, did not find prudential regulators guilty of
maladministration in the period 1999-2000 and ruled that no compensation was due to investors. The second
report extended the time period covered by the investigation and included the GAD in its scope. The publication
of the 2nd UK Parliamentary Ombudsman's report on Equitable Life, originally due for autumn 2006, has been
delayed until May 2007 and its findings could therefore not be included in this report. In her letter to MPs on 16
October 2006 (coincidently, the same day of the EQUI delegation visit to London), the Ombudsman wrote: 'it
became clear that evidence that appeared to be of potential relevance to the matters under investigation had not
been disclosed to us... We received this evidence in July and August 2006' (Annex to WE-FILE19). Mr.
BRAITHWAITE (H11) deplored that this "'truck load' of new written evidence from 2001 which had previously
been concealed from the Penrose inquiry... seems to have succeeded in ensuring that the EQUI report will not be
able to quote from the PO's investigation.
5
see also art.10-13 of the Codified Life Directive 2002/83/EC (CLD), OJ L 345 of 19.12.2002.
6
Directive 79/267/EEC of 5 March 1979, OJ L 63 of 13.3.1979.
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(including solvency margins) are codified in Articles 18 to 27 of 3LD amending Articles 17 to
21 of 1LD1.
Provisions affecting the Conduct of Business rules (COB), including contract law, conditions
of assurance etc., are codified in Articles 28 to 31 and Annex II of 3LD in addition to
provisions of Articles 4 and 15 of the Second Life Directive (2LD)2.
Finally, provisions applying to assurance undertakings in difficulty were codified in Article 24
paragraphs 2 to 4 (1LD)3.
The Third Life Directive thus provides for the creation of a single market in the EU/EEA for
insurance products, based on the rule that the prudential regime in each Member State is
recognized as equivalent by other Member States, and an insurance company regulated in one
Member State and selling its products across the internal market, can be deemed by host
regulatory authorities to have sufficient solvency to sell its products into other Member States,
without having to meet there any additional solvency requirements.
1.
Applicability of Third Life Directive provisions
By contrast to regulations, directives are binding as to the result to be achieved but leave to
the national authorities the choice of form and methods for their implementation4. The Third
Life Directive had to be transposed by Member States by 31 December 1993 and applied at
the latest by 1 July 1994. The formal notification by the UK authorities to the Commission
having transposed the 3LD into UK law was on 29 June 1994, confirming its entry into force
on 1st July 19945.
This deadline is important when considering the role of UK regulators in the Equitable Life
case, as their action in the years 1989-1993 (scrutiny of actuarial reports, prudential
supervision) was accordingly ruled by provisions of the First Life Directive (79/267/EEC).
European Court of Justice (ECJ) rulings have repeatedly placed particular emphasis on the
purpose of a directive.6 Accordingly, the crucial issue is whether a Member State has adopted
all the necessary measures to ensure the full effectiveness of the directive in accordance with
the objective which the latter pursues. As stressed by the ECJ "Member States are under an
obligation to ensure the full and effective application of a directive, meaning that a Member
State is not discharged of its transposition obligations merely by adopting the necessary
1
see also art.20-31 CLD.
Directive 90/619/EEC of 8.11.1990, OJ L 330 of 29.11.1990, see also art.32-36 and Annex III CLD.
3
see also art. 37 CLD.
4
see art.249 EC Treaty.
5
ES-1 stated that "the UK opted for a piecemeal and indirect approach aimed at adjusting its already complex
and sophisticated regulatory system with the principles and standards of the directives. By contrast, Spain and
Ireland opted for a more mechanical and consolidated path based on the importation of the Directive into the
domestic legal system through the adoption of a single legislative act, which basically reproduced the structure
and text of the Directive. In principle... such different forms of transposition are compatible with Community
law, (but) the freedom of choice on the methods and forms does not exempt Member States from the binding
effects of a directive “as to the results to be achieved”.
6
see cases C-14/83 von Colson and Kaman, para.15 and C-62/00 Marks & Spencer v Customs & Excise,
para.27.
2
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implementing measures. Member States remain bound to ensure full application of the
directive even after the adoption of those implementing measures and individuals are
therefore entitled to rely before national courts against the State whenever the full application
of the directive is not in fact secured. That is to say, not only where the directive has not been
implemented or has been implemented incorrectly but also where the national measures
correctly implementing the directive are not being applied in such a way as to achieve the
result sought by it. Further, the ECJ has repeatedly held that directives are binding on all the
authorities of the Member States: not only the legislature but also the administrative agencies
responsible for the day-to-day application and enforcement of the law... are bound." (ES-1,
par.7-8)
2.
Prudential supervision responsibility
Articles 8 and 9 of 3LD clearly define the remit and extent of the Member States' supervising
responsibility, including cases where the assurance company operates in other Member States,
stating that "financial supervision shall include verification, with respect to the assurance
undertaking's entire business, of its state of solvency, the establishment of technical
provisions, including mathematical provisions, and of the assets covering them, in
accordance with the rules laid down or practices followed in the home Member State
pursuant to the provisions adopted at Community level."
In the case of a company having established an operational branch in another Member State,
"the competent authorities of the home Member State shall require every assurance
undertaking to have sound administrative and accounting procedures and adequate internal
control mechanisms." For control purposes, "the Member State of the branch shall provide
that... the competent authorities of the home Member State may... carry out themselves, or
through the intermediary of persons they appoint... on-the-spot verification of the information
necessary to ensure the financial supervision of the undertaking. The authorities of the
Member State of the branch may participate in that verification." The home Member State
may require systematic communication of technical provisions for prudential supervision, but
only for the purpose of "verifying compliance with national provisions concerning actuarial
principles, without that requirement constituting a prior condition for an assurance
undertaking to carry on its business."
3.
Conduct of Business supervision responsibility
The supervision of so-called "Conduct of Business" rules (i.e. contractual terms and practices
affecting the consumer taking out a policy) is another field of responsibility of regulators
appointed by Member States. Article 4 of 2LD rules that "the law applicable to contracts...
shall be the law of the Member State of the commitment... Member States shall apply to the
assurance contracts their general rules of private international law concerning contractual
obligations." The obligation for the host country regulator to intervene is hence limited to
cases conflicting "with legal provisions protecting the general good1 in the Member State of
the commitment."
1
see WE-CONF-26: "The concept of 'General Good' is an exception to the fundamental principles of the Treaty
with regard to free movement... The 3LD does not explicitly spell out what the General Good is supposed to
be... but gives various hints at the motives." (par. 3.4).
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As a measure of consumer protection, policy subscribers must be allowed a cancellation
period of "between 14 and 30 days from the time when he/she had been informed that the
contract had been concluded." (Article 15, 2LD). Furthermore, at least the information listed
in Annex II of 3LD must be communicated to the policyholder, with the possibility to
"require assurance undertakings to furnish information in addition to that ... only if it is
necessary for a proper understanding by the policy holder of the essential elements of the
commitment. The detailed rules for implementing this Article and Annex II shall be laid down
by the Member State of the commitment." (Article 31 3LD)
4.
Assessment of companies' financial situation
Article10(2) of 3LD defines the type of information required from assurance undertakings,
stating that "Member States shall require assurance undertakings with head offices within
their territories to render periodically the returns, together with statistical documents, which
are necessary for the purpose of supervision. The competent authorities shall provide each
other with any documents and information that are useful for the purposes of supervision."
5.
Implementation of supervisory measures
Article 10(3) of 3LD defines the instruments Member States have to adopt to enable them to
implement these supervisory measures, stating that "every Member State shall take all steps
necessary to ensure that the competent authorities have the powers and means necessary for
the supervision of the business of assurance undertakings with head offices within their
territories, including business carried on outside those territories, in accordance with the
Council directives governing those activities and for the purpose of seeing that they are
implemented."
Article10(3) further specifies that "These powers and means must, in particular, enable the
competent authorities to:
(a) make detailed enquiries regarding the assurance undertaking's situation and the
whole of its business, inter alia, by gathering information or requiring the submission
of documents concerning its assurance business, carrying out on-the-spot
investigations at the assurance undertaking's premises;
(b) take any measures, with regard to the assurance undertaking, its directors or
managers or the persons who control it, that are appropriate and necessary to ensure
that the undertaking's business continues to comply with the laws, regulations and
administrative provisions with which the undertaking must comply in each Member
State and in particular with the scheme of operations in so far as it remains
mandatory, and to prevent or remedy any irregularities prejudicial to the interests of
the assured persons;
(c) ensure that those measures are carried out, if need be by enforcement, where
appropriate through judicial channels."
6.
Supervision of foreign-based companies
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The question of prudential supervision of foreign-based companies is governed by Article 8 of
3LD, stating clearly that "the financial supervision of an assurance undertaking, including
that of the business it carries on either through branches or under the freedom to provide
services, shall be the sole responsibility of the home Member State." It adds that "if the
competent authorities of the Member State of the commitment have reason to consider that the
activities of an assurance undertaking might affect its financial soundness, they shall inform
the competent authorities of the undertaking's home Member State."
7.
Supervision of accounting and financial situation
Article 18 of 3LD states that "the Home Member State shall require every assurance
undertaking to establish sufficient technical provisions, including mathematical provisions, in
respect of its entire business" to be determined according to well defined principles1. In
particular, Article 20 of 3LD stipulates that "the assets covering the technical provisions shall
the account of the type of business carried on by an undertaking in such a way as to secure
the safety, yield and marketability of its investments."
It was suggested, however, that the calculation of bonuses in insurance contracts and its
'smoothing effect' on policies - a key factor when assessing EL's operations - was "not
deriving from EU law, but had to be considered rather a matter of private contract law"2.
8.
Supervision of companies in difficulty
Article 24, paragraphs 2 to 4 of 1LD state that "for the purposes of restoring the financial
situation of an undertaking... the supervisory authority of the head-office Member State shall
require a plan for the restoration of a sound financial position be submitted for its approval.
If the solvency margin falls below the guarantee fund ... the supervising authority of the headoffice Member State shall require the undertaking to submit a short-term finance scheme for
its approval... It shall inform the authorities of other Member States in whose territories the
undertaking is authorized of any measures and the latter shall, at the request of the former,
take the same measures. The competent supervising authorities may further take all measures
necessary to safeguard the policy-holders' interests..."
9.
The Commission and the Equitable Life case
As documented by evidence sighted and confirmed by EU Commissioner Charlie
McCREEVY (H8), the earliest correspondence received by the Commission on the Equitable
Life case dates to February 20013, i.e. when the case had already been widely debated in the
UK press, well after the House of Lords rulings and after Equitable Life had closed to new
business. In its first replies, the Commission stated it would "wait for the outcome of the
Penrose report before determining what actions, if any, should be taken."4
1
cfr. art. 18-16 3LD, with art. 25-26 referring to solvency margins.
cfr. Prof. Tridimas (WS1), who also stated that "the Hyman case ruling as such did not touch EU law".
3
letter from MEP to Commissioner Frits Bolkestein, 27.02.2001, followed by 5 letters from other MEPs, 2 EP
written questions and 7 complaints from individual citizens.
4
see WE-CONF11 and WE 73, page 4.
2
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In March 2004, the complaints received were still not registered as formal complaints by the
Commission Secretariat General, which asserted that the objective of Community
infringement proceedings is to "restore or establish the compatibility of national law with
Community law and not to rule on the alleged incompatibility of a past regulatory or
supervisory regime", adding that "any claims for alleged damages must be pursued before
national courts." In substance, the Commission - citing "strong legal advice based on Court
jurisprudence"1 - persistently claimed that it did not need to take a decision on the alleged
past incompatibility with EC law of UK regulators' prudential supervision over Equitable
Life, as long as the current compatibility of the regulatory regime was ascertained.
In H8 Commissioner Mr. McCREEVY confirmed that it is "the Commission's key job of
making sure that Community legislation is properly implemented", adding that "checking
Member States' implementation of Community legislation is a difficult exercise. It is time and
resource-intensive. There are linguistic problems. Translations are not always available.
Member States frequently implement our directives by amending multiple pieces of existing
legislation and often fail to provide transposition tables".
His clear message was that "the Commission is not responsible for the supervision of
individual insurance undertakings. That is the job of the national authorities.... the
Commission is not and cannot be the supervisor of the supervisors." Assessing in particular
the Equitable Life case, Commissioner McCREEVY concluded by saying that "the UK
authorities reacted quickly following the Society's crisis and closure to new business ... I think
one can safely say that the regime that applied prior to the crisis of Equitable Life no longer
exists." (WE73)
10.
CEIOPS and the 'Siena Protocol'
The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS2) previously called 'European Conference of Insurance Supervisors' - was established pursuant
to Decision 2004/6/EC of 5 November 2003 and began its operations on 28 May 2004.
CEIOPS is composed of high-level representatives from the insurance and occupational
pensions' supervisory authorities of the EU Member States3.
In application of the "Lamfalussy Process"4 to the banking and capital markets sectors,
1
2
see oral evidence in H1 and H7.
for further information consult www.ceiops.org.
3
The authorities of the European Economic Area Member States (Norway, Iceland and Liechtenstein) and EU
candidate countries, as well as the European Commission, participate in CEIOPS as observers.
4
The 'Lamfalussy process' is an approach to the development of financial services industry regulation adopted
by the EU (named after the chair of the EU advisory committee that devised it), consisting of four levels:
 Level 1: The EP and Council adopt legislation in co-decision, determining framework principles and
guidelines on implementing powers.
 Level 2: Technical implementing measures taking the form of further directives and/or regulations,
adopted under powers delegated at level one.
 Level 3: Networking between regulators with a view to producing joint interpretative recommendations,
consistent guidelines and common standards, peer review, and comparisons between regulatory practice
to ensure consistent implementation and application.
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CEIOPS has been performing the functions of 'Level 3 Committee' for the insurance, reinsurance and occupational pensions sectors. This role involves providing advice to the
Commission on the drafting of implementation measures for framework directives (for
example on 'Solvency II', its core undertaking at present1) and advising on insurance and
occupational pensions' regulations as well as the establishing of supervisory standards. Its
recommendations and guidelines aim at enhancing the convergence and effective application
of the regulations, thus facilitating cooperation between national supervisors and upgrading
the 1997 'Siena Protocol'. However, concerning its specific implementing powers, CEIOPS
has to be seen as a 'mediation mechanism where national regulators are subject to peer
pressure, not to cogent enforcement.'2
The 'Siena Protocol', signed on 30 October 1997, relates to the collaboration of the
supervisory authorities of the EU Member States in the application of the Directives on life
and non-life insurance. It considered that "the adoption of the 3LD insurance and life
assurance framework Directives, which set up single authorisation and single supervision,
particularly financial supervision exercised only by the competent authorities of the home
Member State, makes necessary a deepening of their co-operation, which is already covered
by protocols applying the First and Second Directives." It was intended to "uphold practical
collaboration between national administrative services for the purpose of facilitating the
supervision of direct insurance within the European Union and of examining any difficulties
which might arise in the application of the Directives." (WE55)
The supervisory authorities declared that "the analysis of the situation of undertakings in their
respective countries calls for a variety of supervisory methods and practices and for a
collection of different accounting documents and statistics. The standardisation of supervision
would be improved by means of a common language of analysis and harmonisation of
insurance accounting documentation and statistics. The supervisory authorities confirm that
they must have a standard document allowing them to verify the state of the solvency margin,
since this is not immediately apparent from an examination of an undertaking's accounts."3
Referring to cooperation and professional secrecy, the supervising authorities agreed to
"exchange confidential information whenever possible, within the limits of the rules laid down
in the Third Directives...) in order to improve the effectiveness of insurance supervision in the
European Community" adding that "the rules for collaboration set out in the protocol may
show themselves to be inadequate when faced with actual cases and agree that as a result
they will be expanded as the need arises."4
11.
The Solvency II project
Referring to the ongoing work on the main regulatory project for the insurance business5,

Level 4: Monitoring by the European Commission of MS compliance with EU legislation and
enforcement action where necessary
1
see H7, Mr. Bjerre-Nielsen, and the following chapter 11.
see H7, Mr. Bjerre-Nielsen.
3
see WE55, part I, point 1.3.
4
see WE55, part I, points 1.4-1.6.
5
The proposal for a new solvency framework for the insurance sector (Solvency II) should be adopted by the
Commission in the second half of 2007, aiming at entry into force in 2010.
2
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Commissioner McCREEVY (H8) stated that the Solvency II project "has already created a
new climate of supervisory cooperation at EU level", confirming that it was the Commission's
"current top insurance priority" with the ambitious aim of bringing about "nothing less than a
fundamental revision of insurance regulation and supervision in the EU. The current solvency
regime... is showing its age! Solvency margin requirements for insurers were first introduced
at EU level over thirty years ago and the method of calculation has remained essentially
unchanged since then. They were designed for an insurance industry and a world that no
longer exist... Solvency II has the challenging job of achieving a balance between the
expectations of consumers, supervisors and insurers. It is crucial that the industry should not
lose its appetite for risk because of excessive supervisory obligations. But it is also important
that companies are fully aware of the risks they are taking on and accept the corresponding
consequences. Within the Solvency II framework, solvency requirements will be based on the
company’s risk-profile. An insurer that better controls its risks may then be permitted to hold
less capital." (WE73)
In brief: the aim of Solvency II is not to increase overall levels of capital requirements but
rather to ensure a high standard of risk assessment and efficient capital allocation. This would
contribute to increased market transparency and help developing a level playing field across
Europe, as a key step in the implementation of a true single market in financial services. In
fact, as the capital currently required from insurance companies under Solvency I appears to
be inadequately allocated, it led to the strengthening of regulations in a number of Member
States, thus creating a patchwork of solvency rules. The new common solvency framework
should therefore be based on clear economic principles for the measurement of assets and
liabilities, with risk measured on the basis of consistent principles and capital requirements
based directly on these measurements.1
Thus, if implemented correctly, the Solvency II framework would have a positive impact on
policyholders, giving them better protection by ensuring companies improve their risk
management practices and hold appropriate levels of capital. At the same time, it would lead
to a more efficient capital allocation across the industry, a lower risk of company failure and,
consequently, greater confidence in the insurance business and its financial stability.
12.
Questions to be answered
Analyzing the EC law provisions as defined by the Third Life Directive in the context of this
part of the mandate, the committee had to find answers to the following questions:
1. Were UK supervisory and regulatory bodies effectively created and adequately equipped
with staff and resources to fulfil the duties detailed in Article10(3) of 3LD ?
2. What - and when - could the UK regulatory bodies have reasonably been expected to
discover in the Equitable Life case, if they had correctly exercised their supervisory and
regulatory powers on prudential regulation following provisions detailed in Articles 10 and
13 of 3LD ?
3. Did UK regulators react in a timely and correct manner once problems with Equitable Life
1
see also 'Solvency II Introductory Guide', CEA 2006 and WE-CONF18 for more specific details
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became known to them, in particular on spotting and highlighting the risks inherent in GARs,
as requested by Article 13(3) of 3LD ?
4. Did the UK regulators and regulators in other Member States concerned correctly
supervise the application of conduct of business rules on their territory? Did they assist
policyholders addressing complaints to regulators?
5. Was there an appropriate flow of information and concerted action between UK regulators
and regulators of other Member States in relation to EL's activities on their territory?
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II.
The UK Life Insurance Regulatory System
UK insurance companies have been required to make detailed accounting and actuarial
returns1 to enable the monitoring of their state of solvency since the adoption of the "Life
Assurance Companies Act" of 1870. A more formal authorisation regime backed by
regulatory powers was consequently introduced in 1967 and later strengthened by the
introduction of the concept of "policyholders' reasonable expectations" (PRE)2 and the
statutory role of "Appointed Actuaries" in 19743.
It appears that UK prudential supervision of life insurance companies had been traditionally
inspired by a doctrine of “freedom with publicity” defined as "life insurance companies
would make their affairs public through financial information being placed in the public
domain." Accordingly, it was desirable to have "some prudential supervision of life insurance
business to safeguard policyholders’ interests but it was also desirable not to restrict
commercial freedom ... as excessively intrusive prudential supervision could have an
inhibiting effect on the development of an innovative and competitive life insurance market ...
At its heart, the supervisory regime remained one based on insurance companies’ freedom of
action rather than on prescriptive rules."4 However, academics suggest that EU financial
services legislation has improved the UK legal framework governing financial services
provision: "In most areas of UK financial regulation, ranging from market abuse/insider
dealing, capital adequacy, insolvency ratios for insurers, and capital market regulation, the
UK legal regime has benefited immensely and has been reformed by EU legislation. The
implementation of EU financial services law into UK law has not undermined the UK’s ‘soft
touch’ principles-based system of financial regulation."5
Over the past two decades, the regulatory and supervisory framework of life insurance
companies in the UK has evolved in different steps, leading to the creation of the single
Financial Supervising Authority (FSA), which gained its full regulatory powers only in
December 2001. Until then, UK insurance companies that sold long-term investment products
were regulated from within two UK Government departments: the Department of Trade and
Industry (DTI) from 1989-1997, and later HM Treasury (HMT) from 1998 to 20016, with the
1
The Insurance Companies Act 1982 required life insurance companies to submit the abstract of the 'Appointed
Actuary's valuation report', the 'Annual report' and the company's 'Annual Accounts' required under the
Companies Acts. Secondary legislation further specified the content of prescribed regulatory returns which - in
the late 1990s - could run to several hundred pages. (compare. WE32, para.44)
2
As specified in WE32, para.30-31, the concept of 'policyholders' reasonable expectations' has never been
specifically defined and did not have its origin in EC legislation, i.e. EC legislation never created an equivalent
legal requirement to PRE. It was unique to the UK but although this standard should have lead to a conservative
estimation of a company's liabilities, it clearly did not prove helpful in the EL case.
3
see Insurance Companies Act 1974, section 2 (15).
WE32, para.23.a,b,d.
5
see Prof. Kern Alexander, WE-FILE 31, point 4 (1).
6
HMT contracted out the day-to-day supervision of insurance companies to the FSA, but remained solely
competent to exercise the statutory powers under ICA82.
4
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technical assistance of the Government's Actuary Department (GAD)1 responsible for the
actuarial analysis of company returns and operations, according to a specific mandate
("service level agreements"2) and which is supposed to signal to the regulator any elements of
concern their analysis might have uncovered. It appears, however, that part of the staff
responsible for 'day-to-day' prudential supervision of insurance companies migrated from DTI
to HMT and later to the FSA, thus providing a measure of continuity in regulatory action and
responsibility.
1.
Application of Third Life Directive provisions
Relating to the practical implementation of prudential and conduct of business supervision by
UK regulatory authorities, ES-1 has identified "three different categories of discrepancies
between specific domestic regulations and articles of the 3LD, although the nature and
number of such discrepancies does not provide conclusive evidence to suggest that UK
legislation has violated the letter or the spirit of EC legislation on life assurance
undertaking."3
Under Article 10 of the EC Treaty, Member States and their administrative agencies have to
act in 'sincere cooperation', in this context specifically imposing on competent national
regulatory authorities a duty to exercise supervisory functions with due diligence, although
the provisions of 3LD awarded them "considerable discretion as to the appropriate course of
action in any given case, i.e. as to when and by what means to intervene in order to prevent or
terminate irregularities" (ES-1, para.28)
2.
Prudential Supervision
Prudential supervision in the life assurance business can be defined as:


Ensuring that companies who are not fit and proper, not appropriately resourced and
soundly managed, do not carry on life insurance business
Protecting policyholders against the risk of life assurance companies being unable to
pay valid claims or being unable to meet policyholders' reasonable expectations
The prudential requirements for corporate governance and financial management4 to be
enforced by UK regulators appeared broadly equivalent to prudential requirements in other
Member States, except for the addition of UK-specific features such as the concept of
'policyholders' reasonable expectations' (PRE), the GAD and the Company Actuary
1
The GAD, created in 1919, had no equivalent in other Member States, where actuarial advice was provided to
the regulators by either employed or independent actuaries.
2
The service level agreements were revised in 1995 and 1998.
3
Discrepancies mentioned include cases where a) requirements of domestic law went beyond those of the
Directive (e.g. the Appointed Actuary); b) requirements which might have infringed provisions relating to the
home country control principle (e.g. UK legislation not requiring the Secretary of State to inform the competent
authorities of other MS of a decision withdrawing authorisation or restricting a company's freedom to dispose of
its assets); c) requirements in relation to the powers of the regulator (e.g. UK legislation permitting the Secretary
of State to waive the application of prudential regulations). For further details see ES-1, para.26 and Annex II,
table 9.
4
Prudential requirements include i.e. for directors, managers and controlling shareholders to be 'fit and proper',
the principle of 'sound and prudent management', minimum solvency margins, minimum guaranteed funds etc..
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(Appointed Actuary).
2a)
Period 1982 - 1998
Under the Insurance Companies Act 1982, which had incorporated provisions required by the
implementation of the 1LD, the Department of Trade and Industry (DTI) was responsible for
prudential supervision of insurance companies (including Equitable Life) as well as for policy
and legislation in this sector. Until 4 January 1998, the DTI department known as the
"Insurance Directorate" had immediate responsibility for prudential insurance regulation (i.e.
ensuring firms were solvent), with the assistance of the Government Actuary's Department
(GAD).
"GAD began to provide actuarial advice on insurance matters to the prudentially competent
authority in the 1960s. This included advice on individual companies, on new applications for
authorisation to write life insurance business and on policy issues, either of a general nature
or relating to the affairs of particular companies... GAD acted solely as an adviser to the
prudential competent authority. All powers under the statute were retained by the prudential
competent authority, with GAD having no authority to instruct a company or its Appointed
Actuary to take any actions, but only to provide advice to the prudential competent authority
to assist it in the fulfilment of its supervisory responsibilities. In practice in later years of the
period GAD corresponded with companies directly on technical matters." (WE32)1
Institutionally, the GAD reported to the Chancellor of the Exchequer and its Department
Minister is the Financial Secretary to the Treasury. In practice, "it was the responsibility of
GAD to monitor the financial position of each life insurance company, including examination
of annual regulatory returns, quarterly regulatory returns ... and other information, to discuss
matters with the company, and in particular with the Appointed Actuary, to clear up any
uncertainties and, if possible, to resolve any disagreements. GAD would then report to DTI ...
GAD developed its own working rules to define what was acceptable ... issued as guidance to
Appointed Actuaries in the form of letters ..." (WE32)2. The main output of GAD's monitoring
of an insurance company was a "Detailed Scrutiny Report" for the prudential supervision
authority.
At the start of the period under review, "there was no doubt that GAD was the dominant
partner in the supervision of life insurance companies. GAD had more resources and
technical expertise than the officials in the insurance division of the DTI. But the balance of
power had shifted more to the staff involved in supervision by the time responsibility for
supervision transferred from the DTI to the Treasury in 1997, partly as a result of increased
numbers and better quality of supervision staff".3
In May 1997, the UK Government announced the creation of a single industry regulator (the
future FSA), independent from government, which was to take over the roles of nine existing
self-regulating bodies.
1
WE32, para.8-9.
WE32, para.10,14.
3
see ES-2, Chapter 4.1.
2
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2b)
Period 1998 - 2001
While the FSA was being created, HM Treasury assumed (from 5 January 1998 until 1
January 1999) "full responsibility as prudential competent authority, answerable for DTI's
past actions in that capacity" (WE32)1. As part of the transitional phase, the DTI Insurance
Directorate staff was transferred temporarily to the Treasury, pending transfer to the FSA. The
Treasury was therefore directly responsible for the prudential regulation of insurance
companies such as Equitable Life. From 1 January 1999, as part of a transitional arrangement,
the Treasury outsourced the day-to-day supervision of insurance companies to the FSA,
remaining ultimately in charge and retaining its regulatory role until the FSA was given full
statutory powers by the Financial Services and Markets Act 2000 (FSMA).
2c)
Period post-2001
Today the FSA is an independent non-governmental body, a company limited by guarantee
and financed by the financial services industry. The Treasury appoints the FSA Board,
currently consisting of a Chairman, a Chief Executive Officer, three Managing Directors, and
10 non-executive directors. The Board sets out overall policy, with day-to-day management
being the responsibility of the Executive. As sole financial regulator, the FSA is accountable
to the Treasury, and through it to the UK Parliament.
The FSA gained full regulatory powers on 1 December 2001 and currently has, out of nine
sector teams, one specifically dedicated to the supervision of the insurance sector. Its key
functions are risk-identification (identify emerging insurance risks and coordinate ways to
mitigate these), managing contacts with a wide range of external stakeholders for the
insurance sector, keeping under review the coherence of FSA requirements and policies as
they bear on the insurance sector and, if needed, interpreting new rules and requirements.
Every year, each insurer authorized by the FSA must send it an insurance return containing
audited financial information and auditors' reports.
3.
Conduct of Business (CoB) Regulation
The purpose of the Conduct of Business rules in the life assurance business can be defined as
ensuring that:




retail insurance products offered on the market are suitable to investors
investors understand all risks involved in the policy they take out
advertisements for insurance products are fair, clear and not misleading in their
message
performance forecasts are based on adequate justifications.
In the late 1980s, the Conduct of Business (CoB) regulation was governed by the "Financial
Services Act" of 1986, which had replaced the "Prevention of Fraud Investments Act" of 1958
and established a regulatory regime for the carrying on of retail investment business.
Operators had either to obtain authorisation from the Securities & Investments Board (SIB),
1
WE32, para.7.ii).
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the core of the later Financial Services Authority, or to become a member of a Self-regulating
Organisation (SRO) which supervised members by reference to their own rule books. Thus,
SROs derived their power from their contractual relationship with their members and
regulated independent financial advisers or other subjects related to the marketing of retail
investment products to the general public. SRO dealt also with complaints about mis-selling.
However, "if an SRO were to expel a life office from membership, the effect would not be to
deprive it of its authorisation to carry on insurance business or to sell its policies but merely
to transfer the life office to the care of the SIB." (ES-2)
The Financial Services Act of 1986 had designated two particular SRO for Conduct of
Business supervision1:
- LAUTRO (Life Assurance and Unit Trust Regulatory Organisation)
- FIMBRA (Financial Intermediaries Manager and Broker Regulatory Association)
In 1994 these were merged into the PIA2 (Personal Investment Authority) which from 1998
onwards, contracted out its functions to the FSA, in anticipation of the latter becoming the
sole prudential and conduct of business supervising authority.
The relationship of the prudential supervisor with the conduct of business supervisor was
critical in the UK, while close cooperation and information-sharing was vital to ensuring
proper supervision of insurance companies. As a condition for recognition as an SRO, PIA
had to be “able and willing to promote and maintain high standards of integrity and fair
dealing in the carrying of investment business and to co-operate, by the sharing of
information and otherwise, with the Secretary of State and any other authority, body or
person having responsibility for the supervision or regulation of investment business or other
financial services.”3 While CoB concerns could be symptomatic of spotting a wider malaise
in the company, which needed to be pursued by the prudential supervisor, the CoB regulators
also had an interest in any prudential problems affecting a life office, since such problems
could indicate a need to scrutinise marketing materials more closely, to ensure that they were
not misleading.
Before 1 January 1999, when FSA took over the day-to-day monitoring of compliance with
PIA’s conduct of business rules together with the prudential supervision of life offices, the
two regulators operated under separate legislation in different locations with little formal
contact and did not set up any regular information-sharing procedures. From 1999 onwards,
the staff responsible for the day-to-day supervision of life offices under the two services level
agreements were located in the same building in FSA but decision-making powers remained
with the PIA Board for CoB rules and with HMT for prudential matters until FSMA came
into force at the end of 2001. It took some time for each side to acquire a better understanding
of the objectives and preoccupations of the other and to learn how to work together.
On 1 December 2001 (when the FSMA came into force) the SRO were dissolved and the FSA
1
The UK and Ireland were "the only MS to have CoB regulators who operated separately from the prudential
supervisors; their powers were strictly limited and they were regarded as the junior partner in supervision" (ES1, page 6).
2
Equitable Life was a member of LAUTRO, joining PIA in July 1994.
3
see ES-2, chapter 9.
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became, in addition to being the prudential supervisor, the sole Conduct of Business
regulatory authority for life insurance companies.
4.
The Appointed Actuary (AA)
The concept of Appointed Actuary (AA) was introduced by the "Insurance Companies Act"
of 1974 and has been for decades a critical feature of the UK regulatory system. The idea was
to "designate a specific professional person within the company who could be relied on by the
prudential competent authority to monitor the financial position of the company on a
continuous basis ... It was regarded as the professional responsibility of the AA to monitor the
overall financial position of the company. Having the AA at the heart of the company (with
full right of access to the Board) ... was intended to provide protection for policyholder
interests, as well as a strong internal system of financial control and risk management."
(WE32)1 He was normally "the first point of contact for GAD within each life office." (ES-2)
The AA "had to hold 'prescribed qualifications', which included a requirement that the
actuary must have attained the age of 30 and be a Fellow of the Institute of Actuaries or the
Faculty of Actuaries; subsequently it became a requirement ... to hold a “practising
certificate” from the Faculty and Institute of Actuaries" (WE32)2
In practical terms, the AA was there "to make sure there were sufficient assets in the company
to fulfil the promises and activities in which the company indulges." (WE59)3 The AA had
specific duties to report to the board on the financial condition of the company, to advise it on
bonus distribution and possibly on the interpretation of Policyholders' Reasonable
Expectations (PRE). He had to make an annual report on the company’s financial condition,
presented to the board and included in abstract in the company’s regulatory returns, which
were sent to GAD.
Appointed actuaries therefore had no regulatory functions as such but were supposed to report
to the regulatory authority if the board did not heed their advice on certain key matters,
possibly triggering regulatory action. They were also required to certify the section of the
regulatory returns showing the company's liability valuation, inducing a possible closer
scrutiny of the returns by regulators. The status of the Appointed Actuary varied considerably
between life assurance companies.
The FSA reform of insurance regulation, taking full effect on 1 January 2005, abolished the
role of the Appointed Actuary in favour of requiring company boards and senior management
to take responsibility for actuarial issues and bringing these issues within the scope of the
company's external audit. (WE37)4 5
1
WE32, para.26,28,29.
WE32, para.41,42.
3
on role and responsibilities of actuaries, see also the Q&A at the House of Commons Treasury Select
Committee, minutes of the 24 April 2004 session (WE59).
4
WE37, para.25 d).
5
Switzerland appears to have introduced the figure of 'Appointed Actuary' in the Swiss financial supervisory
system based on the British model, as reported by the representative of the Swiss Office of Private Insurance
(H6).
2
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The Actuarial Profession was the first to set up an independent committee of inquiry
(December 2000) into the events surrounding the closure of Equitable Life to new business
and its implications. The Corley Report1, published in September 2001, led a review of the
adequacy of the professional guidance issued to Appointed Actuaries, to see whether there
had been any contributory factors to the problems at Equitable Life. It concluded in broad
terms that guidance had been adequate but recommended that the profession should require
the work of Appointed Actuaries to be subject to 'peer review' (WE50).2
5.
Regulators' Intervention Powers
The major focus of prudential supervision in the UK was on the company's financial
resources. In order to assess their adequacy, regulators had to verify the assurance companies'
technical reserves, solvency margins and minimum guaranteed funds, with powers to obtain
information and the production of documents needed for the assessment. The prudential
supervision was based on the disclosure and monitoring of the regulatory returns submitted by
the companies, designed to show not only the company's current solvency position but also,
through the resilience tests, their sensitivity to future adverse changes. The regulatory returns
were also published, so that information about the financial position of the life office was
readily available to financial advisers, financial journalists and competitors.
Based on the Insurance Companies Act 1982, any formal intervention by UK regulators had
to issue from the prudential supervisor (DTI, HMT or FSA, not the GAD) whenever a
company was not meeting the established criteria of sound and prudent management or when
a company was found in breach of specific ICA requirement. For instance, failure to maintain
the minimum solvency margin could lead to a request from the prudential supervisor under
Section 33 of the ICA to submit a short-term financial scheme to bring the company back into
compliance3. The regulator could also impose a number of penalties, such as ordering the
company to deliver its regulatory returns early, limiting the maximum aggregate premium
income, transferring company assets to a trustee and ultimately the withdrawal of the
company's trading authorization, as detailed by ICA 82, Sections 38-44.
1
'Corley Report' named after its author, Roger Corley, President of the Institute of Actuaries.
2
see WE50, para.82: "... The logic of (EL's) unusual bonus philosophy is clear and did not appear at the time to
have contravened regulations. But it received only limited support from other actuaries ...".
see WE50, para.89: "On the question of whether the guidance was adequate, we conclude that most of the
matters we have identified for which guidance was relevant were covered by the Guidance Notes in some form,
even if the wording on some points was general rather than specific ...".
see WE50, para.90: "We have not found evidence to suggest that any Appointed Actuary of the Equitable failed
to take account of the guidance that was current at the time the various decisions were made. We do not know
what conclusions any Appointed Actuary at the Equitable reached when considering how the published
Guidance Notes affected his decisions, nor what advice he gave to the management or the Board. We also
cannot tell whether the decisions of the Board were in accordance with that advice. We have seen no evidence to
indicate that any Appointed Actuary at the Equitable was at any time so concerned about the nature of those
decisions that he felt it necessary to 'blow the whistle' to the regulator."
3
see ES-2, Chapter 3.2.1.
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Section 451 of ICA 82 provided the Secretary of State power "to require a company to take
such action as appears to him to be appropriate for the purpose of protecting policy holders
or potential policy holders of the company against the risk that the company may be unable to
meet its liabilities or ... to fulfil the reasonable expectations of policyholders or potential
policyholders.” Recourse to Section 45 was however limited to cases when the purpose of
policyholder protection was considered not achievable by the exercise of powers under
Sections 38-44 and to preclude "restricting the company's freedom to dispose of its assets."2
Amendments to ICA 82 introduced with the implementation of 3LD and taking effect from
1st July 1994 "introduced new criteria for 'sound and prudent management' set out in a new
Schedule 2C to the Act, and added to the grounds on which, under section 11, the Secretary of
State could direct that an insurance company should cease writing new business, that any of
the criteria of sound and prudent management were not being, might not be, or might not
have been fulfilled in respect of the company."3
In an international comparison, ES-1 considers that UK supervisors "preferred to avoid the
use of formal statutory powers wherever possible". Thus while the UK and Irish supervisors
had similar enforcement powers, the German insurance supervisor's powers were "more
extensive and specific and would support a more interventionist approach ... The German
system contemplated a more intrusive system of monitoring and inspection than in other
Member States, allowing representatives of the supervisory authority to attend supervisory
board meetings, providing for ad hoc inspections without the need to show due cause, up to
the replacing of members of management and of the supervisory board."
Referring to enforcement of CoB rules, the use of intervention powers by PIA in relation to
life insurers (such as restrictions on dealing with assets or a requirement to maintain certain
assets) could be exercised only by the prudential supervisor (DTI/HMT) and were outside the
PIA’s powers. The proposed use of intervention powers by the PIA/SIB had to be notified in
advance to the DTI/HMT, which had a power of veto over the proposed intervention action.4
6.
Regulators' Liability 5
As far as Regulators' liability is concerned, it may be worth noting that under Common Law a
supervisory authority may be held liable only for the tort of 'misfeasance in public office'.
This would require a proven element of 'bad faith', with liability limited to losses that could
have been foreseen by the authority as a likely consequence of its action/omission6.
Self-regulating Organisations (SRO) and their officers were not liable in damages for actions
or omissions in their functions, unless the act or omission was proved to have been done in
'bad faith'7.
1
ICA 82(45): 'Residual power to impose requirements for protection of policyholders".
ICA 82(45)(2).
3
see WE-CONF25, para.4-5.
4
see ES-2, chapter 6 and 7.
5
The subject of regulators' liability has been elaborated in more detail in Part V of this report
6
see also the conclusions of WE71.
7
Financial Services Act 1986, section 187(1).
2
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Under EC law, supervisory liability is limited to 'serious breaches' in the implementation of
EC law but only if the infringement has affected individual rights and there is a direct causal
link with the damage sustained by the injured party. Recent ECJ rulings appear to have further
weakened supervisory liability, asserting supervisory authorities' responsibility to act 'only in
the public interest', meaning that supervising functions are to be fulfilled to protect a plurality
of interests rather than the interests of any particular group of investors1.
Following the publication of the Penrose Report in 2004, a legal study2 assessed the chances
of claims by EL or by its individual policyholders against UK regulators, based on their
regulatory failings, as highlighted in Chapter 19 of the Report. The conclusions were not
encouraging as far as possible legal action is concerned, stating quite clearly that "the Society
has no realistic claims against the regulators". Claims of 'common law negligence' or 'breach
of statutory duty' by the prudential regulators were considered too weak, as "it cannot be said
that the regulator failed to consider whether to exercise its powers of intervention under the
ICA 1982 or that no rational prudential regulator could have acted in the way it did; and
further, the ICA 1982 does not confer private law remedies on the Society." As to potential
claims of 'misfeasance in public office', it concluded that "there is nothing... to suggest that
any one or more of the individuals employed by the prudential regulators exercised power
unlawfully, specifically intending to injure the Society, or with reckless indifference to the
possibility of such injury. There does not appear to be any realistic prospect of such evidence
emerging." Finally, no arguments were found supporting legal action by policyholders against
the CoB regulators, claiming 'breach of human rights' or 'bad faith'.
An outsider chance was seen only for a "potentially arguable claim on the part of
policyholders for breach of the Third Life Directive, in respect of the arguably excessive value
ascribed to the reinsurance treaty in the Society’s technical provisions", however highlighting
the "uncertainty regarding the merits of a novel claim of this sort" and concluding that there
would likely be "numerous complex causation and loss issues, a lengthy and costly litigation,
leaving it unclear as to what extent the Society might ever benefit financially from such a
claim." (WE71)
III.
Key findings of the Penrose and Baird reports on Insurance Regulators
1.
The Baird Report (October 2001)
The Baird Report was an internal audit commissioned by the FSA and therefore focuses
mainly on its own specific role in the assessment of the Equitable Life case. However, it
contains findings that can shed some light on the role of financial regulators in general and on
1
see ECJ ruling in case C-222/02 Peter Paul et al. v Germany, 12 October 2004.
see WE71: the legal advice was given by UK law firm Herbert Smith in a letter to the directors of EL on
14.4.2004, and considered potential claims against prudential regulators (based on ICA 82) and against CoB
regulators (based on FSA 86), including claims in respect of the breach of 'enforceable private rights' arising
from the 3 EC Life Directives.
2
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this case in particular1.
In general terms, the report defines the role of the prudential regulator as having "... to
exercise judgements so that it is confident that the company will remain solvent and meet the
reasonable expectations of policyholders, without intruding unreasonably into the
management of the company" (par. 6.1.5). But at the same time it recalls that the FSA remit
included a consensus view that "it is neither realistic nor necessarily desirable in a climate
which seeks to encourage competition, innovation and consumer choice, to seek to achieve
100% success in avoiding company failure."
Concerning the adequacy of the regulator's available resources, the report recalls how "the
FSA has finite resources and, as a consequence, is continually exercising its judgement of
risks to determine how to deploy its resources to best effect" (par. 6.3.3). While conceding
that "the crude comparator of 'staff resources deployed per institution regulated' shows banks
and building societies having more than double the resources of those that are deployed on
life insurance companies" (par. 7.9), it reports not seeing at FSA "lack of resources as an
issue in the prudential regulation of Equitable Life, ... but rather a better application of
resources" (par. 6.3.4).
Concerning the question of the FSA reaction in the Equitable Life case, it concedes that "when
responsibility for the prudential regulation of Equitable Life was transferred to the FSA,
Equitable Life ... was already a high profile, “live” issue and was the subject of discussions
which had been initiated by HMT-ID" (Treasury's Insurance Department) (par. 6.2.2.).
However, it comes to the conclusion that "by 1 January 1999, the “die was cast” and we have
seen nothing which the FSA could have done thereafter which would have mitigated, in any
material way, the impact of the outcome of the Court case as far as existing policyholders
were concerned, or made any material beneficial difference to the final outcome so far as
Equitable Life was concerned." (par. 6.2.4.).
Nonetheless, the report admits there were "a number of things which the FSA could have done
better ... occasions when both the prudential and the conduct of business regulators did not
spot issues to be addressed or, having spotted them, did not follow them up", citing as the
main reason "the poor level of communication and coordination between the two arms of
regulation, prudential and conduct of business." (par. 6.2.5)
In Chapter 7 ("Lessons to be Learned") the report finally makes a number of technical
recommendations2 on the future FSA regulatory structure to prevent similar shortcomings.
1
As recalled by Mr. BRAITHWAITE (H11), the Baird report was precluded from looking at the period of
primary negligence, from 1990-98 and it covered only the 23 months prior to closure, for which the FSA was
responsible.
2
Recommendations were made in particular in relation to: tightening of solvency standards; disclosure of
financial reinsurance; introduction of multiple control levels; independent review of AA; content and frequency
of regulatory returns; improvement of proactive regulatory culture; improvement of communication and
coordination within FSA, along with the improvement of risk-assessment processes, in order to ensure
"consistency of interpretation and application across the regulatory process".
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The Penrose Report (March 2004)1
2.
The Penrose Report deals in great detail with the role of regulators, describing and
commenting on the regulators' scrutiny of Equitable Life's regulatory returns since the late
1980s. The report was however "explicitly precluded from allocating blame or addressing
compensation."2 In Part 6 (Chapters 15 to 18), Lord Penrose relates how the financial strength
of the Society was perceived by the prudential regulators and how they approached their
supervisory tasks, how they regarded the relationship between prudential and conduct of
business regulation and how they responded as the crisis unfolded.
2.1
Definition of prudential supervision
Chapter 15, par.7 and 8 define the focus of prudential supervision as "the financial soundness
of the insurer and its ability to handle the risks to which it is exposed and meet its liabilities.
Thus, as defined in a 1995 service level agreement between DTI and GAD:



To regulate the insurance industry effectively (within the duties and powers set out
in the [1982] Act) so that policyholders could have confidence in the ability of UK
insurers to meet their liabilities and fulfil policyholders' reasonable expectations.”
To protect consumers by ensuring persons or companies who are not fit and proper,
appropriately resourced or soundly managed do not carry on insurance business in
the UK.
To protect policyholders against the risk of companies being unable to pay valid
claims. In the case of life insurance companies, this includes the risk that they will
be unable to meet policyholders' reasonable expectations.”
Or to put it briefly: "The main purpose of insurance supervisory legislation is to protect the
public from loss through the insolvency, dishonesty or incompetence of an insurer."
Lord Penrose further recalls that "besides informing the regulators at DTI and their advisers
at GAD, regulatory returns were public documents and this transparency was relied upon to
impose additional discipline on life companies by exposing details of their financial position
to critical analysis by informed commentators ..." (par. 9)
2.2
Intervention powers by regulators
Under the Insurance Companies Act 1982 and on specific grounds, the prudential regulators
had the power to issue a direction withdrawing a company's authorisation to conduct new
business and the power to intervene in a number of circumstances. In addition, a "residual
power" enabled the prudential regulator to take any action needed to protect policyholders or
potential policyholders against the risk that the company might be unable to meet its liabilities
or fulfil the policyholders' PRE3.
In his report, Lord Penrose specifies that "the regulatory role of DTI was underpinned by
1
Underlining in this section was added by the rapporteur.
Mr. BRAITHWAITE (H11).
3
see ICA 82, Sections 11,37,38,45.
2
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various powers of the Secretary of State under the Act, including powers to require
information, to withhold approval for new controllers, and to intervene in the running of the
business in various ways, ultimately including withdrawal of authorisation to write new
business..." (par.10)
Considering the incorporation of PRE as a trigger for intervention in 1973 "the regulator was
bound to consider not only whether the concerns about PRE were sufficient to justify its
exercise, but also how it might be exercised in a manner that was appropriate to the purpose
... The regulator would have to balance a number of competing interests, for instance the
expectations of several groups of policyholders, or the interests of actual and potential
policyholders." (par. 11)
A differing interpretation had been presented to the Penrose inquiry by GAD, stating that
"intervention would only be exercised where it was “obvious” that reasonable expectations
were not going to be fulfilled, and that this would “stop well short” of seeking to ensure value
for money or a particular level of bonus regardless of the surplus revealed by the periodic
valuation." (par.12)
2.3
Interaction of regulators
Defining "initial scrutiny" as the regulator being "specifically directed ... to consider whether
the documents are accurate and complete, and is required to communicate with the insurance
company “with a view to the correction of any such inaccuracies and the supply of
deficiencies” (par.13)
In 1984, the respective responsibilities of DTI and GAD for the regulation of insurance
companies were formalised in a "service level agreement" (reviewed in 1995), detailing that
"DTI retained responsibility for taking formal action on behalf of the Secretary of State, and
... remained the primary interface with the company but GAD were responsible for the
examination of returns and were given discretion to pursue questions directly with the
insurance companies ... though they were not permitted to approach auditors directly, nor
were they to contact appointed actuaries ". (par.34)
The agreement set out a scheme of priority ratings (1-4) to be assigned by GAD on the basis
of their initial scrutiny of returns (1=top priority, 4=low priority). A further agreement was
drawn up in October 1998 for the transfer of functions from the DTI to Treasury. "The
staffing levels available to the prudential regulators varied, but the number of staff with direct
responsibility for the Society and their grades within the civil service remained broadly
constant." (par. 39)
"Interaction between prudential and CoB regulatory bodies ... (partly viewed as 'tick-box'
regulators) seems to have been relatively limited in the 1980s. From 1992 there was some
additional formalisation of the interaction through the mechanism known as a 'college of
regulators': regular meetings between various financial services regulatory bodies, hosted
and chaired by the body perceived as the lead regulator for a certain type of firm: for life
insurers, this was DT." (par.26 and 29).
2.4
The unchallenged double role of Mr. RANSON
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Under the 1982 Insurance Companies Act the DTI was also assigned the task of considering
whether an insurance company and its management (i.e. directors, appointed actuary and
significant shareholders) were 'fit and proper' to assume their role.
An issue of particular concern appears the role of Mr. Roy RANSON, Appointed Actuary of
Equitable Life since 1982, who on 30 June 1991 became Chief Executive of the Society
without relinquishing his former post. This raised the question of a possible conflict of interest
negatively affecting the policyholders' interests - a problem addressed by regulators on several
occasions but without any formal action being taken by them.
The report details how "GAD was consulted. The Government Actuary, Christopher Daykin,
advised on 17 April 1991 that he wished to discourage Ranson from holding both positions,
other than on a very temporary basis ... The Society was informed by DTI on 26 April that it
was considered undesirable for the same person to hold both positions ... Ranson said that the
Society's in-house actuaries needed a further 12 months or so of senior management
experience before assuming the role of appointed actuary. It was preferred that he should
remain the appointed actuary for 12-18 months until an in-house replacement was appointed
... Daykin agreed that the temporary situation could be accepted and Burt informed DTI on
13 May that GAD were content on the basis that it was intended to be for a limited period."
(Ch.16-35 and 36).
In reality, Mr. RANSON was allowed to overstay in his double role far beyond the initially
allocated "transition period" of 12-18 months, finally staying on for over 6 years until his
retirement in July 1997.
2.5
Alleged Regulators' shortcomings in general
The Penrose report cites a number of shortcomings by UK regulators in the accomplishment
of their regulatory and supervision duties which are here summarized for easier
comprehension in three groups according to severity. Again, a reference to the time-frame
related to the application of the First (1LD) or Third (3LD) Life Directives (i.e. before/after
July 1994) should be taken into account to correctly assess the report's findings.
a) Lack of knowledge and/or weak monitoring
"The scrutiny reports on Equitable's regulatory returns from the mid to late 1980s were
relatively brief, terse documents, normally running to a page or a page and a half. They were
prepared by GAD ... The scrutiny reports would record a few headline figures, the amount of
new business written, the movement in mathematical reserves and the cover for the required
minimum margin (RMM) of assets over liabilities." (Ch.16-1.) The Society's cover for the
RMM was clearly a key index ... dropping through the mid to late 1980s, from 8.5x in 1984 to
3.8x in the 1988 returns. In the absence of the correspondence files, it is not possible to say
exactly what doubts may have existed over the returns, or how the downwards trend in cover
for RMM was regarded, but it would not appear to have been an issue of any great concern to
regulators." (Ch.16-3)
"There are no DTI correspondence files dealing with Equitable for the period prior to 1991. A
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group of earlier files was destroyed ... in 1998 while the regulatory return files were still
available (1987 and 1988 missing) back to 1981." (Ch.15-46, 47 and 53)
"The scrutiny of the 1989 returns was completed on 5 December 1990. The report was only a
page." (Ch.16-14)
Pickford (GAD actuary) observed that in 1991 “our remit was mostly concerned with
solvency, rather than bonus declarations. Asset share techniques were only just being
developed at this time. We did not monitor a company's bonus smoothing process, therefore,
focusing instead on compliance with the regulations, especially on the valuation of liabilities
and solvency margins ... as a result the system as a whole was open to exploitation by unregulated decisions on bonus mix." (Ch.16-53)
Lord Penrose comments having discussed "the formulation of the bonus notice in the context
of PRE. ... but no-one at GAD or DTI appears to have taken note of the change in format at
the time. Neither organisation made it their practice to look at bonus statements. Indeed, the
Society's approach to bonuses, which I understand was unique, was not mentioned by the
regulators until March 1993." (Ch.16-57)
"Line supervisors and senior line supervisors were not equipped by qualification or
experience to form an independent view on the significance of such issues." (Ch.16-81)
In the analysis of the 1991 returns it went unnoticed that "there appeared to be “little or no
margin” in the valuation rates used in 1991. In order to pay the bonuses declared in 1989
and 1991 the company needed to earn 11¼% per annum. In fact the company earned +3%
over the two years instead of the required 23%." (Ch.16-83)
"GAD was not expected to “give a great deal of emphasis to bonus declaration issues, except
in cases where PRE was a source of dispute”. The service level agreement did not provide for
GAD proactively to pursue bonus policy issues with companies." (Ch.16-120)
"The scrutiny report on the 1993 returns ... ran to some 17 pages. This was the first new style
scrutiny and contained not only much more information about the company but also sections
which highlighted 'Key Features' and 'Action Points'. The new style reports, later formalised
in the 1995 agreement between DTI and GAD, were a vast improvement in the quantity and
quality of information supplied to DTI." (Ch.16-142)
"So far as regulators were concerned, it appears that the liability of members of the Society
for the loan debt was of low priority. The risk may not have been understood by regulators.
On 9 December 1997, the line supervisor wrote to her German counterparts in response to a
query about the Society's position: “Equitable is a mutual insurance company. This means
that it is owned by its policyholders and there are no shareholders. Being a member does not
involve any obligations other than the obligation to pay the premiums.” I cannot endorse this
view. Equitable was and is an unlimited liability company". (Ch.16-215)
b) Complacency or "easy hand" policy by Regulators
"Regulation, and GAD's advice, were focused exclusively on the solvency margin over
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contractual liabilities and took no account of accrued terminal or final bonus,
notwithstanding that, at the date of the 1989 report, exposure to falling markets was real and
was known to GAD and the regulators." (Ch.16-16)
"The Society ... was too venerable to be of real concern, and lack of information provided
grounds for inaction ... Regulators had been given an insight into the Society's practice that
might reasonably have alerted them to a need for monitoring of current and future practice.
No special steps were taken to put in place a suitable system." (Ch.16-21)
On 19 May 1992, there was a meeting between Equitable Life and the regulators, "the meeting
was part of a programme of three-yearly visits by DTI and GAD to companies and was the
first visit to the Society under the programme, and the first meeting between GAD and the
Society since November 1990 ... The senior DTI line supervisor for the Society from 1986 to
1991 has told the inquiry that he had never met anyone from the Society face to face. This
state of affairs was explained on this basis: “As ELAS were perceived to be well run and
sound there would have been no reasons to seek a meeting.” (Ch.16-58)
"Pickford (GAD) said that it had not gone as expected and that he had come away quite angry
and frustrated that they had not been able to see and assess any other of the Society's
managers." (Ch.16-70)
"The perception of the Society's uniqueness was echoed in a number of the regulators'
statements taken by the inquiry. It is unfortunate that appreciation that the Society was unique
did not provoke a keener interest in the implications for policyholders." (Ch.16-71)
"While the scrutiny (of the 1991 returns) was in progress, advice was submitted ... to the
Secretary of State regarding an invitation to lunch received from the Society. It does not
appear from the files that GAD had passed to the DTI the revised figures as per Ranson's 15
June letter and the brief was probably prepared on the basis of the earlier figures." (Ch.1674)
"The meeting on 19 May 1992 was ... an important opportunity to get what further
information was available and to face the Society's problems head on. Regrettably it seems
that although some issues were raised with the company, little if anything was resolved."
(Ch.16-99)
"Possibly due to the changes of staff at GAD and the DTI after the 1991 scrutiny report, it
appears that the general concern about the Society and the specific questions raised ... were
allowed to evaporate. The process was lengthy. The quality of GAD's response to queries was
poor, and the letters uninformative. The decision to ask no further questions but instead to
look ahead to the next year, reflected previous practice. But it resulted in failure to obtain a
full account of the Society's position." (Ch.16-103)
"The labelling of the Society as unique appears frequently within the regulatory papers, but
what is absent is any analysis of the extent to which this might prove a barrier to effective
regulation and, if so, what changes to the current regulatory system might be needed ...
Despite terminal bonuses, the valuation basis and new business strain, none of these issues
was effectively dealt with or resolved by GAD or DTI. The scrutiny process for the 1991
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returns indicates that, without explicit guidance from GAD, the regulators did not have the
depth of knowledge about the Society that would have enabled them to make a more accurate
assessment of the Society's financial strength. GAD did not provide detailed explanations of
many of the issues raised." (Ch.16-104)
"There was no immediate regulatory response to the Society's return to the GAD survey (on
bonus distribution). It is not possible to say what was made of the enigmatic first point, that
"regard was had ... to projected trends in asset shares." (Ch.16-106)
"In late 1993, the company received an AA rating from Standard & Poor's for its excellent
claims paying ability.” (Ch.16-123)
"The Society's return to the bonus survey called for analytical review. It was not selfexplanatory and the reference to future trends in asset shares clearly required investigation.
The information provided ... could not be reconciled with the replies on asset share
methodology and the smoothing cycle, except on the basis that the period had not been
normal. The nature and extent of the abnormalities required further investigation. None was
undertaken." (Ch.16-131)
"The failure to respond to the information tendered about annuity guarantees and the
proposed solution was a serious error. The bonus survey replies showed that no specific
information was given to policyholders on the likely frequency of changes to final bonus rates.
... Failure to relate the problem of low interest rates and the increase in final bonus at this
stage and to explore Ranson's description of the Society's approach, however garbled and
obscure, resulted in regulators having no insight into the annuity guarantee issue until it was
disclosed publicly in 1998." (Ch.16-132)
"It appears that DTI did not have sufficient sources of information, internal or external to the
Society, to respond to the information that such annuity guarantees existed and were
becoming valuable. DTI did not receive a copy of the December Board paper until late 1998
well after the GAR issue had emerged ... Casual acceptance of the Society's position on
guarantees as a selling issue, and not one raising prudential issues, reflects complacency for
which there could be no justification on information available to the prudential regulator and
GAD." (Ch.16-134 and135)
The meeting held on 9 December 1994 "was the first meeting attended by anyone from the
Society other than Ranson ... and Ranson announced that he would continue with his dual
role until the spring of 1996" (Ch.16-153)
"If GAD did not raise it as an area of concern, DTI would not be concerned" (Ch.16-166)
"The papers prepared for the December 1994 meeting had reflected some concern about the
Society in that year; the weakness of the liability valuation, reliance on 'aspirational' assets,
vulnerability to shocks, the risk of distribution policies generating policyholders' reasonable
expectations, over-distribution and the need for particular vigilance in supervision. The
issues had not been debated fully or resolved. The declaration of a growth rate of 10% as
against a negative investment return of 4.2% combined with the weakness of the valuation
should have caused the regulators to dig deeper into the Society's financial health. Once
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again, other than to note that the Society was vulnerable, the regulators seemed complacent
about its position (reflected in ... being reduced to a rating of 4, which meant that there would
be no requirement for scrutiny to be completed earlier than within 9 months)". (Ch.16-191
and192)
"On 17 November 1997, the National Health Service executive wrote to DTI asking about the
suitability of the Society to be their AVC provider. An internal memo about the request noted
that the Society's RMM cover for the 1996 returns was 2.53x and 2.07x without the implicit
item. In a handwritten note ... the line supervisor noted that they had referred to the strong
solvency cover of another well-known company in reply to a similar recent request but that
the Society's cover “isn't that hot”. Having considered the appropriate response, the reply to
the NHS, dated 26 November 1997, stated that, based upon the 1996 returns: “we would say
that the company is financially sound. There are no outstanding issues of a material nature
pertaining to the DTI's regulation of [the Society or its subsidiaries].” There is no reason to
view this statement as other than honest and it is clear that some consideration was given to
the reply but as an honest assessment it reflected the poor understanding of the realistic
financial position of the Society that DTI had at November 1997." (Ch.16-226)
"The 1996 scrutiny report suggested, for the first time in a scrutiny report, that it would be
“desirable” for the Society to hold back more of its emerging surplus by declaring lower
guaranteed bonuses, while keeping up generous final bonus payouts, as long as expectations
were not raised. The picture that emerges is of a very incomplete understanding of the
statutory requirement and a narrow approach to the assessment of PRE. This was the first
scrutiny report to have a specific heading entitled PRE (within the bonus section). Despite
this, there seems still to have been no system in place (nor any in contemplation) by which
PRE might have been actively assessed. The correspondence which followed the scrutiny ...
appears ... to show that whilst GAD were becoming increasingly concerned about the
Society's vulnerability, bonus notices and PRE ... they viewed their remit in this area as
limited to one in which they sought and received reassurance from the Society that they were
alive to the problems." (Ch.16-247 and 248)
In January 1999 "there appears to have been a lack of enthusiasm for positive intervention,
and preference for advice and warning of the possibility of action failing remedial steps by
the Society. The briefing note for the 15 December 1998 meeting had painted a picture of a
company that could not afford to declare a bonus and it had been concluded at the meeting
itself that there was power under the sound and prudent management umbrella to prevent
such a declaration. With intervention as a last resort ... passing a bonus was "probably
necessary for the prudent management of the Society”. In any case, FSA did not insist."
(Ch.17-110)
"(EL) Headdon's self-indulgent interpretation of “a few % points” was disregarded by all but
the more junior of the actuaries involved. GAD considered that no effective action could be
taken." (Ch.17-111)
"Due to the explosion of the annuity guarantee issue there had been no scrutiny report on the
1997 returns and therefore the regulators had not had the benefit of such a report since the
1996 scrutiny report in December 1997. GAD completed the initial scrutiny of the 1998
return on 9 April 1999 ... The FSA still lacked the further information about solvency
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projections and contingency plans requested ... on 1 February 1999. They chased the Society
for these (and a copy of the finalised reinsurance treaty) on 15 April. The full scrutiny report,
dated 20 May 1999, ran to some 23 pages and headlined the Society's priority rating as 2. It
combined statements on both 1997 and 1998" (Ch.17-128,133 and139)
"The relative complacency of the1998 report reflects the extent of the reliance being placed
upon the reinsurance treaty by both GAD and FSA, and the concentration of attention on
regulatory solvency rather than any realistic view of the Society's long-term position."
(Ch.17-146)
"In August 1999, while the outcome of the (High Court) case was awaited, FSA prepared an
“initial risk assessment” of the Society as part of a pilot project for a new risk-based
approached to supervision. In it the Society was classified as a “high financial risk” because
of the level of guaranteed benefits, low free asset position and the difficulty of raising external
finance. Under the heading 'Management' the Society's cultural attitude was described as
having: “A tendency toward arrogant superiority regarding the efficiency of their operations
and the high priority given to the interests of policyholders. This can blind them to the
financial risks that can arise as a result of guaranteeing high benefit levels. However they are
open with the regulator and there are no particular concerns about the level of cooperation
that has been shown in the past.” The assessment acknowledged that there was little evidence
available about corporate governance." (Ch.18-22)
"On 13 September 1999 the FSA senior line supervisor suggested to Headdon that there
should be a general company visit in early December (the last such visit had been in
November 1996)." (Ch.18-25)
c) Negligence by Regulators
"No scrutiny report has been found in either DTI or GAD files for 1987 or 1988, and the
inquiry has been told by the then principal actuary ... that it is possible that no detailed
scrutiny report was prepared because GAD were involved in a recruitment drive ... to fill
various vacancies." But "these years were crucial as 1987 was a poor year for the Society in
the markets... and the Society's available assets were insufficient to cover total policy values
at the end of each year." (Ch.16-7)
"Burt (principal actuary at GAD) ended with a surprising conclusion ... “At present we do not
have enough information about the society to be more specific and indeed, unless the society
makes more signals, we do not suggest that further information should be sought. The society
is our longest established life company and is well respected in the market". Yet "examination
of ... the Society's practice would have revealed that, despite a total allocation well below the
investment return in 1989 ... policy values accounted for 104% of available assets, which in
turn might have revealed a substantial deficit brought forward from 1987 or before. But this
information was not required as part of the returns, nor was the Society asked to provide it
otherwise at this stage." (in 1990 - Ch.16-21 and 28)
Scrutinizing the 1990 returns, GAD failed to realize that "the Society had allotted a notional
total growth rate of 12%, despite a net investment return of minus 10.4%, the first negative
return for the Society since 1974 ... Pickford (GAD) had been put in possession of critical
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information that disclosed the Society's precarious position and the extreme nature of the
steps taken to maintain bonus allocation in a year of severe losses." But "it would appear that
Pickford respected Ranson's request not to pass the papers to DTI. In an undated note to Burt
about the letter and its contents, Pickford concluded that: “I don't think we need to show
these to the DTI unless the situation in due course warrants it.” (Ch.16-40 and 43)
Negligent behaviour appears evident when "on 26 July, not long after the receipt by DTI of
the 1990 returns, Pickford (GAD) wrote to Ranson thanking him for the papers, referring to
discussions at the upcoming meeting about issues “in this general area” and assuring him
that they would get "an extremely restricted circulation". ... Later Pickford acknowledged he
was in error in allowing a private understanding with Ranson to cloud his duties to
regulators.” (Ch.16-43 and 44)
On this issue Lord Penrose concludes saying that "GAD have told the inquiry that it was
established practice for information that was “primarily technical and actuarial in nature
and had been provided to GAD” not to be routinely passed to DTI, and that the papers in
question revealed nothing of immediate concern as regards the Society's solvency position.
GAD also appears to reject my view that the papers disclosed important changes to the
Society's bonus system ... I do not accept GAD's view of the papers' contents or their
significance, or the basis upon which they were withheld from the regulators. The 1990
scrutiny report was sent to DTI on 20 November 1991. At a page and a half it was typical of
the period, but given the concerns existing at the time, it appears totally inadequate ... The
papers which Ranson passed to Pickford disclosed an approach to the 1990 bonus allotment
that should have raised serious questions amongst the regulators. Having received them,
Pickford appears to have made little of them ... He did not pass them to DTI." (Ch.16-46, 47
and 52)
"Roberts (DTI) commented on 4 November 1992: “This paints a worrying picture. Overdistribution by a company with a (deliberately) short coverage of its RMM and a (continuing)
policy of high equity exposure. I think we should ask GAD for a better assessment of the
position and of the options available to the company in the event of a significant further
downturn in the market ... How long could it continue with present bonuses in the face of a
zero yield?” These comments do not seem to have been passed on to John Rathbone, who had
taken over from Burt as principal actuary, until 14 January 1993." (Ch.16-86)
"The priority rating for the Society' regulatory returns for 1992 had again been 3. The
scrutiny report for 1992 was not completed until 28 March 1994 and ran to only two pages.
In general the points were favourable." (Ch.16-124)
"The regulators failed to respond to the existence of the guaranteed annuity rates and the
Society's proposed solution, as revealed (albeit opaquely) in the returns and at the November
1993 meeting. Nowhere in the scrutiny report for 1993 was anything said about the annuity
guarantee issue ... There has been no explanation of the failure of those involved to note the
importance of this issue ... The regulators also missed an opportunity to make a full
assessment of the Society's increased use and presentation of final bonus." (Ch.16-163 and
164)
"Each year from 1987... to 2000 aggregate policy values exceeded available assets at market
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value (albeit by varying amounts and percentages) on a fund basis. The figures for the post1991 period that would have demonstrated this were never in the possession of the regulators
and, until the end of 1997, never requested by them." (Ch.16-173)
"Whatever GAD was told about the position as at November 1996, information which would
have shown the duration and full extent of the excess seems not to have been requested from
the Society. Thus on two important issues (terminal bonus and the excess policy values
position) there seems to have been a failure by the regulators to ask for and analyse such
further figures or documents as would have enabled them to make a proper assessment of
problems that were then being discussed with the company." (Ch.16-206)
"Whatever level of concern was developing within GAD (in May 1998) and being expressed
on these various issues, the documents available do not reflect any corresponding concern on
the part of the Treasury, or appreciation that GAD may have been communicating concern to
the regulator. The Treasury remained wholly passive, depending on GAD to initiate any
action required." (Ch.16-251)
"Concern was growing, but remained low level. HM Treasury appear to have been content to
allow GAD to conduct the dialogue with the Society without active Treasury participation ...
consistent with the service level agreement (a revised agreement was concluded in December
1998). However, reading the service level agreement only deepens the impression that any
broader regulatory view that might have been formed was being subordinated to ongoing
technical discussions on a purely actuarial basis. It was a transitional phase in the
development of regulation. It is difficult to avoid the view that regulation was falling between
two stools, the major player in discussions having no regulatory power, and the empowered
regulator having little part in the processes that would have instructed regulatory action."
(Ch.16-252)
"The High Court hearing was due to commence on 5 July 1999. On about 8 June the senior
line supervisor circulated a paper entitled 'Equitable Life Court Case-Possible Scenarios'. So
far as the inquiry has discovered, this was the first document prepared by GAD or FSA which
recorded any substantive consideration of the court case. ... The formulation of the
consequences of the worst-case scenario was focused on immediate or short-term
administrative problems. It did not identify any longer term considerations relating to the
Society's future." (Ch.18-1 and 6)
"The first meeting with the Society about the court case took place on 29 June 1999 (a few
days before the hearing was due to commence and over six months since the Society had
notified HMT of their intention to raise proceedings)." (Ch.18-17)
"On 22 May 2000 the senior line supervisor offered the opinion that “[The Society] are not
the strongest life office you will find but nor is there an immediate prospect of them going
broke (even if they lose in the House of Lords)”. In short, the adverse judgment was not seen
as affecting materially the Society's financial position, and very little was done by FSA in
relation to the court case between the Court of Appeal judgment in January and whispers of
the possible outcome in June and July of the House of Lords' hearing. There was no updating
of the earlier scenario document (prepared for the High Court hearing) until the day before
the House of Lords' judgment." (Ch.18-47)
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2.6
Timeline of acknowledgement by Regulators of concerns about Equitable Life
14.11.1990: "Burt (principal actuary at GAD) expressed concern about the position of the
Society, particularly if the market were to fall any further or even remain at its present level.
Ranson acknowledged that if the market fell by a further 20% they would “have problems and
he would have to consider what action should be taken. Although there were clear concerns,
the implication of the memos from both GAD actuaries was that no further action was
required."(Ch.16-11, 23) However, "having been concerned about the position of the Society
in 1990 (as reflected in the 14 November 1990 meeting and the correspondence which
followed), neither GAD nor DTI appear to have sustained this level of interest in the Society
during 1991." (Ch.16-51)
14.05.1992: "In the margins of the Burt (GAD) memo, one of the supervisory team at DTI
noted, in addition, that “Paul Burt thinks they have been paying too much in bonuses." ... And
under weaknesses it listed: ... Mr Ranson's position as Principal Executive and Actuary may
create problems because there is nobody to blow the whistle when things go wrong ...
Pickford (GAD) noted that he liked the Society's philosophy for its policyholders, but felt that
its solvency strength was arguable ... and stated that he would be concerned about the
Society's performance if there were dramatic falls in the market. There the matter appears to
have rested.”(Ch.16-66 and 68)
15.09.1992: "On 10 September Ranson sent some background information to Burt (GAD).
This information ... laid bare the current reality of the excess of aggregate policy values
(defined in the letter as “present values of guaranteed benefits plus final/terminal bonuses at
the rates then current”) over asset shares as follows:
1989: 104%; 1990: 124%, 1991: 120%
This was information that would not have been available in the returns. At some stage this
letter was passed on to DTI." (Ch.16-77).
04.11.1992: "Meanwhile the scrutiny report had caused some disquiet at DTI. Roberts
commented in manuscript on the report...: “This paints a worrying picture. Overdistribution
by a company with a (deliberately) short coverage of its RMM and a (continuing) policy of
high equity exposure. I think we should ask GAD for a better assessment of the position and of
the options available to the company in the event of a significant further downturn in the
market... How long could it continue with present bonuses in the face of a zero yield??"
(Ch.16-86)
11.01.1993: "the Society had applied for and been granted a Section 681 order for a future
profits implicit item of £360m." (and again for increasing amounts in the following years).
The GAD memo concluded: "Overall I suspect that Equitable could survive a short-term fall
in market levels, even a substantial one, as well as most companies. Their portfolio, however,
must leave room for concern, were there to be a prolonged period of depressed share value.
Their recent shift towards fixed interest securities will ease the difficulties, although they
1
Section 68 of the Insurance Companies Act 1982.
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argue at the expense of the expected ultimate benefit to policyholders.” (Ch.16-93)
30.11.1993: At this meeting between regulators and the Society "the existence of the annuity
guarantees and Ranson's proposed solution were apparently disclosed to both GAD and DTI
... However it was not followed up and did not receive another mention in the regulatory
papers until after the issue had been exposed in 1998. Thus GAD had uncovered a GAR
issue..." (Ch.16-117)
09.12.1994: "A GAD briefing note dated 6 December prepared for the meeting listed recent
issues ... applications for certain section 68 orders in relation to investment holdings, the
Society's classification of critical illness and major medical expenses plans, and Ranson's
dual role. The list of concerns was narrowly focused. It omitted reference to either the annuity
guarantee or the bonus issue ... It was the first meeting attended by anyone from the Society
other than Ranson." (Ch.16-152 and 153)
05.11.1995: An article appeared in a Sunday newspaper reporting that Equitable Life had a
low free asset ratio and suggested that independent financial advisers were not recommending
the Society's products. "On 6 November 1995 DTI received a telephone call from a
policyholder who wanted to know what they were going to do about the poor financial
position of Equitable as reported in the press article. An internal note dated 8 November drew
the article to the attention of the senior line supervisor. It noted that: EL has a different way
of calculating their reserves than most [companies] but surely their financial strength can be
ascertained from the DTI returns, albeit not necessarily from Form 9. Otherwise how [would]
S+P1 be able to give them such a good rating?” (Ch.16-177)
08.11.1996: "The scrutinising actuary noted that the Society had to be very careful about their
bonus statements to ensure that customers were not misled about the benefits. There appears
to have been no follow-up on this point, as the notes moved to another issue, the strength of
the valuation. Ranson ... intended to stay on "until the changes had been consolidated.""
(Ch.16-203 and 204)
13.01.1998: "The scrutinising actuary asked whether it was correct that total current asset
shares exceeded total current admissible assets and requested a figure for the accumulated
asset shares for all in-force accumulating with profits contracts at the end of 1996. Headdon
responded ... that he had some difficulty in understanding the question about assets shares,
but confirmed that the total face value of the policies including final bonus was in excess of
the attributable assets." (Ch.16-234 and 235)
27.02.1998: "GAD responded ... while offering the reassurance that no consideration was
being given to outlawing the Society's bonus notices ... that: “it would become a matter of
concern if any holders of accumulating with-profits contracts were ever to feel that they had
been misled.” Further GAD stated: "The manner in which Equitable operates as a mutual,
giving the best possible returns to each generation of policyholders, with the consequent lack
of any substantial unitised free estate, does mean that you do not have much of a cushion to
enable you to protect holders of such contracts from the natural effects of future falls in the
market value of assets. We remain confident that your company is fully aware of this.” This
1
Standard & Poor's.
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correspondence was passed to insurance division, now transferred to the Treasury." (Ch.16238)
06.12.1999: "The meeting was attended by the two FSA line supervisors, the principal and
scrutinising actuaries and Nash, Headdon, Thomas (the investment director) and the general
manager, sales and marketing, from the Society ... The supervisors intended “to fill in some of
the gaps in its knowledge about the Society” at the visit ... The issue of GAR reserving was
taken up and the senior line supervisor announced that the Government Actuary would be
writing to all companies to clarify his January guidance, which could mean that Equitable
would need to increase its reserves. It had thus taken nearly 10 months for GAD and the FSA
to decide to clarify the reserving guidance, leaving the possibility that the 1998 returns (as
well as the 1997 returns) showed reserves for the annuity guarantees which were thought by
the regulators to be inadequate." (Ch.18-38)
2.7
The Penrose Report's conclusions
The Report dedicates a substantial part of its conclusions (Chapter 19, paragraphs 149-163) to
the UK regulatory regime. It highlights how "prudential regulation of life insurance
companies focused on a system of returns ... and in the case of the Society, supplemented in
and after 1991 by visits to life offices. (Equitable was among the first offices to be visited.)
The returns required information relating to the long-term business of the Society in response
to specific questions." However, regarding the implementation of supervision, he finds that "it
was considered that it was not a proper function of regulation to substitute the regulator's
judgement of what was optimal from a regulatory standpoint for the judgement of the
management." (par.150) While stating that "scrutiny of the returns to ensure conformity with
the current regulations ... did not exhaust the scope of regulation", he specifies that "the
financial information required of offices in the returns of long-term business was focused on
the contractual liabilities of the office."(par.149 and 151)
Lord Penrose further explains how the GAD had told his inquiry that it was “the overriding
principle of regulation and of supervisory monitoring that reliance should principally be
placed on the appointed actuary, who was close to the company and had a professional
responsibility to monitor its financial position on a day-to-day basis and to establish technical
provisions.” Similarly, and referring to the disputed double role of Mr. RANSON as
Equitable Life CEO and Appointed Actuary, those responding on behalf of the Treasury told
his inquiry that "unless the actuary was acting in some way contrary to the regulations, it was
not the task of the regulator (or its actuarial advisers) to substitute its judgement for that of
the appointed actuary in areas where the appointed actuary had a clear professional
responsibility.” (par.154)
While not disputing that there "had been an advantage in not seeking to prescribe a fixed
actuarial approach", Lord Penrose states that in the mid-70s "the system placed too great a
reliance on the appointed actuary", a fact apparently "recognised by FSA in their proposals
for reform of this role." (par.155). However, he highlights that the annual returns to the
regulators contained various "practices of dubious actuarial merit" and that "there was a
heavy responsibility on the regulators to monitor, or to procure the monitoring of, the
valuation of the mathematical reserves and the quantification and treatment of implicit items
in order effectively to assess the solvency position of the Society in terms of the valuation
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regulations" (par.156)
Regarding the question of structures and resources of the UK insurance regulators,
Lord Penrose states very clearly that "the DTI insurance division was ill-equipped to
participate in the regulatory process. It had inadequate staff, and those involved at line
supervisor level in particular were not qualified to make any significant contribution to the
process. Insurance division regulators were fundamentally dependent on GAD for advice on
the mathematical reserves, implicit items, technical matters generally, and PRE, and were not
individually equipped with specific relevant skills or experience to assess independently the
Society's position in these respects. Given the volumes of work to be handled, which extended
far beyond the regular scrutiny of returns, higher-grade officers had little opportunity to
become involved in routine regulation", adding that "a need for greater regulatory resource
had been identified at that time". He concludes saying that "for all practical purposes,
scrutiny of the actuarial functioning of life offices was in the hands of GAD until the
reorganisation under FSA was in place." (par.158)
Although Lord Penrose confirms that "GAD actuaries were held in high regard by the
regulators" he says that "they were often inhibited by their understanding of what was
acceptable within broad and ill-defined standards of practice", suggesting that "Government
required a 'light touch' approach to regulation, and allocated resources accordingly." He
further suggests that "increased resources ... might have improved the chances of identifying
problems", and hints at the UK political climate prevailing for most of the 1990s, when the
Government's objective "was to deregulate, to reduce regulatory burdens on business, to
avoid interference in private companies, and to let market forces prevail." (par.159, 160 and
161)
Finally, he states that "reforms were introduced, within the legislative framework that existed,
but that Ministers had repeatedly ruled out primary legislation in this area" as there had been
a general perception that " life insurance supervision was a success, as there had been only
one insignificant life company failure in twenty years." Partly for this reason "virtually no
primary legislation in the regulatory area for which DTI was responsible was taken forward
by Ministers", adding that he saw no "wish list of legislative amendments that identified
fundamental structural reform as a possible subject for legislation." (par.162)
In his conclusion, Lord Penrose argues that "principally, the Society was author of its own
misfortunes. Regulatory system failures were secondary factors" (Ch.20, par.84) indicating
however the following points as 'key findings'1 of his inquiry in relation to the role of the UK
insurance regulators:
a) UK regulation was based on an over-reliance on the Appointed Actuary, who in the
case of the Society was also the chief executive over the critical period from 1991 to
1997, despite recognition of the potential for conflict of interest inherent in this
position; (par. 240.7)
b) The regulatory returns and measures of solvency applied by the regulators did not
keep pace with developments in the industry ... Thus regulatory solvency became an
1
Chapter 19, page 726.
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increasingly irrelevant measure of the realistic financial position of the Society;
(par. 240.8)
c) The significance of policyholders' reasonable expectations (PRE) under the legislation
was understood by the regulators ... There was, however, no consistent or persistent
attempt to establish how PRE should affect the acknowledged liabilities of the Society;
(par. 240.9)
d) The regulators failed to give sufficient consideration to the fact that a number of the
various measures used to bolster the Society's solvency position were predicated on the
emergence of future surplus; (par. 240.10)
e) There was a general failure on the part of the regulators and GAD to follow up issues
that arose in the course of their regulation of the Society, and to mount an effective
challenge of the management. (par. 240.11).
Lord Penrose concluded by stating that "the picture that emerges is of a Society that had deepseated financial and management problems that pre-dated the emergence of the GAR problem
... The judgement of the House of Lords in Hyman precipitated a crisis, but was not solely
responsible for it. The lessons that emerge are broad, and relate to the responsibilities of all
main parties concerned, directors, management, auditors and regulators." (WS2)
IV.
Other Oral and Written Evidence considered by the Committee
In order better to assess the life insurance regulators' compliance with the Community law
provisions in the UK and the other Member States concerned, the Committee of Inquiry
invited a number of experts and witnesses to present the committee with oral and written
evidence on the Equitable Life case1. Witnesses invited included individual policyholders and
representatives of policyholder associations, government representatives, senior officers of
present and past life insurance regulators in the UK, Ireland and Germany, representatives of
the Commission, actuaries and experts in life insurances, annuities and forensic accounting, as
well as other experts or stakeholders, including the current management of Equitable Life.
According to data provided by Mr. THOMSON, current Chief Executive of Equitable Life, in
2001 "roughly 1.5 million people had an interest in the Society's with-profits fund; this
included about 8.000 with-profits policyholders in Ireland and about 4.000 with-profits
policyholders in Germany. In addition there were approximately 6.500 international policies
sold through the Society's Guernsey office to individuals resident throughout the world, some
of whom will be in Europe"(WE47).
1
We recall the abbreviations used in this report for evidence submitted to the Committee:
H # = oral evidence given at EQUI Hearing; WS # = oral evidence given at EQUI Workshop;
WE # = written evidence filed on EQUI website accessible to public; ES # = external study;
WE-FILE # = written evidence not filed on website; WE-CONF # = confidential written evidence.
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Regarding Equitable Life's international policyholders, Mr. SEYMOUR (WE53) offered more
precise data, stating that the Society had in the late 90s "13.405 policyholders outside the UK,
residing in 13 different EU Member States.1"
The evidence presented by other witnesses focused on a number of key issues which can be
grouped as follows:
1.
Negligence in prudential regulation and supervision
Converging views were expressed by witnesses (petitioners, affected policyholders or
representatives of policyholders' action groups) in highlighting a number of wide-ranging
concerns and complaints against the UK insurance regulators, as well as regulators in other
Member States concerned.
On this specific issue, oral and written evidence considered by the Committee of Inquiry were
submitted by Tom LAKE, John NEWMAN and Paul BRAITHWAITE on behalf of EMAG2
(H1, H11, WE2, WE14, WE26, WE28, WE29, WE44, WE58, WE74, WE75, WE76, WECONF 22-34); Michael JOSEPHS (H2, WE4, WE31, WE42, WE79), Beatrice and Pat
KNOWD (WE4), Nicholas BELLORD (H2), Paul WEIR (H2, WE6); Peter SCAWEN (H3,
WE23), Markus WEYER (H3, WE22); Liz KWANTES (H7, WE51); Leslie SEYMOUR (H7,
WE36, WE52); Joseph O'BROIN (WE3); Michael NASSIM (WE7, WE8, WE33); John
VINALL (WE43); Onagh O'BRIEN (WE-FILE3); Frank TROY (WE-FILE4); K.NOONAN
(WE-FILE11); Fred McGUIRK (WE-FILE8); Peter THORNTON (WE-FILE12); Jim
BERRY (WE-FILE13); Jack DUGGAN (WE-FILE14); Brian EDMONDS (WE-FILE1);
Peter SCHÄFER; Patrick O'FARRELL (WE-FILE9, WE-FILE19); Barry and Susan
GROVES (WE-FILE7); Albert DOUGLAS (WE-FILE5); Dermot BYRNE (WE-FILE6);
John GALVIN (WE-FILE15); Patrick McCARTHY (WE-FILE16); Roy HARDING (WEFILE17); David STONEBANKS (WE46); N.F.NORRISH (WE-FILE20); W. DEPPE
(WE81); Richard LLOYD (H5); Seamus POWER (WE-FILE2), Simon BAIN (H8, WE72).
In their statements they have - to different degrees - accused the UK regulators of failing to
exercise properly their regulatory functions in respect of Equitable Life and of negligently
failing, over a number of years, to recognize, and to react to, a number of clear warning signs
in the prudential supervision of Equitable Life.
In H7, Mr. SEYMOUR claimed that "Article 23 of the Third Life Directive requires that the
regulator had to supervise and know thoroughly what was happening to an assurance
business whose head office was in his territory – I stress both 'in' his territory as well as the
business carried out 'outside' that territory. It also states that the supervisor had to “remedy
any irregularities prejudicial to the interests of the assured persons”.
Representing a policyholders' support group, Ms. KWANTES (H7) claimed that "the UK
government was one of the main backers of the Third Life Directive in the early 1990s and
1
In all, 12.425 policyholders in EU Member States (Ireland, Germany, Belgium, Austria, Denmark, Finland,
France, Greece, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden) and 980 in UK-dependencies
(Channel Islands, Isle of Man, Gibraltar).
2
The Equitable Life Action Group Ltd.
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were very insistent on robust regulation of the Life Industry. A decade later we are told that
the regulation was only 'light touch', whatever that means. In my opinion you either regulate
or you don't regulate, there is no half-way house."
In WE7 Mr. NASSIM claimed that "the regulators spent over-much time debating the
circumstances under which they might use their discretionary powers and in the event never
used them when the overall situation required them to do so. As a result they did not
recognise or react to any of the important successive stages in the development of that
position."
In H8 Mr. BAIN claimed that "lack of supervision allowed Equitable Life to believe it could
do whatever it liked, because it was operating in a regulation-free zone."
Referring to Equitable Life's communication culture, which should have allowed an attentive
Regulator to eventually spot its potential financial weaknesses, a memorandum supplied to the
House of Commons Treasury Committee in January 20011 highlighted how "Equitable
historically did not shy away from revealing its relatively thin solvency cover but, instead,
promoted it as the desirable outcome of what it viewed as its virtuous approach to returning
to policyholders as high as possible a proportion of the returns earned on their premiums.
Given the wide reporting of this in the media, we think it likely that many persons who
became policyholders during the past two decades ... would have been aware of EL's
philosophy on not accruing and maintaining substantial excess solvency. The point about EL's
relatively thin solvency cover is that it always was going to be more exposed than most other
life offices to financial adversity, whether in the form of bad news on the asset side in the
event of poor investment market conditions, or on the liability side in the event of unplanned
liability inflation brought on by issues such as regulatory intervention".
The former Equitable Life sales representative Mr. LLOYD (H5) felt that even the Equitable's
sales force were all "let down by the board of Equitable Life ... It had the duty to tell the
policyholders and the sales staff about the risks associated with adding further sums to the
existing with-profits fund, and those risks should have been known by 1998, and possibly
sooner ... I also feel we were failed by the regulators; no-one in the company outside the
board had access to all of the information available, but the regulators most certainly should
have had this."
Replying to these allegations, the FSA representative Mr. STRACHAN2 (H4) considered the
complaints "reflect a misunderstanding of what the regulators could or should have achieved
in a case such as Equitable Life." He equally recalled that FSA's "risk based supervision
accepts that a regulatory system neither can nor should aim at avoiding all failures ... We are
not seeking to operate a regime in which firm failures do not occur, since we recognise that
such a regime is neither desirable nor possible to achieve in a free market economy. This key
principle characterises both the UK's current and former approach to insurance regulation."
This position was echoed by the UK Treasury representative Mr. MAXWELL3 (H4) who
1
see WE58 for more details.
Director of the Major Retail Groups Division at the FSA.
3
Director for Financial Services Policy at HMT.
2
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stated that "regulation was not static. There was evolution at both the legislative and
regulatory policy level as the market evolved, but the regime did not, and still does not, seek
to prevent all failures of or problems with regulated firms ... When it became clear in 1998
that Equitable Life had made no explicit provision for annuity guarantees when setting its
reserves, the Treasury reacted swiftly and firmly."
A similar note had been struck by Mr. McELWEE (H3) when stating that from a technical
point of view "market failure is not inconsistent with a good supervisory regime" and by
Mr. BJERRE-NIELSEN (H7) saying "I do not think that we as regulators or supervisors are
able to guarantee that there will never be any kind of crisis, collapse, failures or complaints."
The Commission representative Mr. TERTÁK (H1), director for financial services, declined
to comment on any appreciation of the effectiveness or possible shortcomings of former or
current UK financial regulators, highlighting instead its role in the supervision of national
implementations of the relevant EU Directives. However, as emphasised by Commission
representative Mr. BEVERLY in H7 and repeated by Commissioner McCREEVY in H8, the
Commission "could not - and had no means to - be the regulator of regulators".
Declining the committee's invitation to appear at one of the hearings, the former Equitable
Life Chief Executive (and Appointed Actuary) Christopher HEADDON in WE45 aired his
"concerns about the objectivity of the committee members and the way in which evidence is
tested (or, more accurately, not tested). It appears that there is a presumption of huge failing
in the management of Equitable Life in the 20 years or so prior to its closure to new business
in December 2000 ... Commentators fail to recognise the influence of the long bear market in
equities in 2000-2003, which saw the policy results for all life offices reduce significantly. The
committee members’ apparent presumption of huge failing, as described above, would seem
to suffer from the same failure. Policyholders cannot easily distinguish between a reduction in
policy values caused by the particular events at the Society and the general reduction which
affected the whole industry. Many of them appear to be complaining of reduced expectations
rather than any actual loss relative to the market. However, with-profits policyholders across
the industry have had their expectations sharply reduced due to investment conditions." In his
conclusion, he conceded that it was "entirely understandable that an individual policyholder
should not be able to disentangle those two things" but claimed that Lord Penrose's report was
"deeply flawed because he made no attempt to do so either, despite having an explicit
reference to market comparisons in his terms of reference." (WE45)
1a)
Claims of operational shortcomings by UK regulators
As reported in WS2, academic studies have come to the conclusion that the pre-2001 UK
financial regulatory system was "clearly inadequate and lacking coherence, which
undermined its effectiveness, as proven by a number of major bank failures and financial
scandals in the 1980s and 1990s which rocked the UK financial industry."1 These cases
suggest that an inherent weakness existed in the UK banking and insurance supervising
system throughout the 1980s and 1990s, prompting the regulatory reform as defined in the
1
Dr. Kern Alexander cited the following UK financial sector crisis prior to the Equitable Life case: Johnson
Matthey Bankers insolvency (1984), BCCI collapse (1991), Lloyd's scandal (1994), Barings Bank collapse
(1995), endowment mortgages scandal (1999).
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Financial Services and Market Act (FSMA) 2000.
In WE7, Mr. Michael NASSIM detailed allegations of operational failure by the UK
regulators, stating that "the Regulators did not intervene in any effective way, although they
should have known that such over-bonusing would have inevitable effects. In other words, the
Regulator, by inaction, allowed the Society to be put in grave solvency peril, both in
immediate terms and in constructive terms. The claimants’ losses flowed primarily from
reckless behaviour by the Society’s management which over the period 1973-1987 had
critical consequences. This behaviour was of a kind which fell squarely within the scope of
the Regulator’s duties and powers to monitor, warn and compel retraction. The Regulator
took no action or no effective action and allowed actuarial etiquette to guide its conduct
instead of statutory duty. As a result the Prudential Regulator became equally responsible for
the losses in question."
Mr. NASSIM also claimed that "the regulators failed to question why the Society
inappropriately extended its chronic over-allocation by using inappropriate adjustments and
subordinated loans which anticipated future premium income and impacted adversely upon
future profits. As a result they failed to digest the prudential and PRE implications. The
regulators could not detect the reinsurance arrangements made to cover the Hyman position
and did not examine ELAS’ public statement in February 2000 that losing Hyman would cost
members no more than £50 million, when reinsurance to the tune of £800 million was
nominally being sought to cover the same situation."
He concludes saying "if the Regulator had insisted on truly prudent action at that time or
earlier, all final (i.e. discretionary) bonuses would have been suspended indefinitely until the
financial condition of the Society could be fully established. In sum, therefore, there is
sufficient evidence to maintain that operational regulatory failure was total over an extended
period, and that in the later stages it was deliberate, such that it had the effect of
extinguishing many just claims without opportunity of recompense. Had the regulators halted
this progression, an eventually fraudulent position would have been averted, which effectively
they condoned by allowing the Compromise Scheme to take place ... Total operational failure
of this ultimate kind can only be due to an overall deficiency in ethically responsible attitude.
Others have wished further to maintain that, over and above organisational and operational
deficiencies, regulatory failure must also have been collusive."
The memo WE-CONF6 claimed that "it is inescapable that the more someone knew about
conventional assurance methods, the less likely he was to be misled by what Equitable did,
and the more likely to be suspicious about what was really happening to the premiums. Yet
the regulators, who should have been the most expert of all, turned a blind eye to the whole
matter."
In his testimony (H4) Mr. Colin SLATER, chartered accountant and expert in forensic
accounting, highlighted some accounting weaknesses in Equitable Life's operations which the
Regulators could and should have noticed and reacted to. In particular, he reminded how "in
July 2000 the Hyman case loss was estimated to cost the Society £1,500m ... Information
emerged subsequently has shown that the loss of the GAR case was by no means the only
factor contributing to the Society’s downfall ... From the late 1980s Equitable Life tried to
combine the benefits of with-profits smoothing with the transparency of managed fund
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valuations, but without maintaining any estate.1 The Equitable Life approach was set out in
the paper ‘With Profits Without Mystery’ prepared by Roy Ranson and presented to the
Institute of Actuaries on 20 March 1989. The concept did not meet with unqualified approval.
One commentator was Mr. Clark, later President of the Institute of Actuaries (2000-2002)
saying ‘the authors state their belief, that the assets are owned by the current generations of
policyholders'. I believe that the implication the authors draw from this is that, ignoring
smoothing, the sum of individual asset shares for individual policies equals the market value
of the fund. This means that smoothing must be a totally balanced concept that any overpayment to one group of policyholders must be equally and oppositely balanced by an underpayment to another group. Failure to achieve this must inevitably lead to insolvency in the
long run if the rest of the theory is left intact."
Countering accusations of regulators' operational shortcomings, the UK Government detailed
in WE322 why, in their opinion, all requirements of 3LD were correctly implemented in
practice and that in the supervision of Equitable Life all prudential standards required by the
Directive had been applied. In particular they stated that 3LD "required the calculation of the
technical reserves of a life insurance company to be based on actuarial principles, common to
all member states, and as recommended by the 'Groupe Consultatif des Associations
d’Actuaires dans les Pays des Communautés Européennes'. These principles included limiting
the rates of interest that could be used in the valuation, but did not prescribe the valuation
method to be used, the choice of which was left open to member states to decide3. The
Directive introduced a requirement for “admissibility limits” in relation to assets but
prevented member states from requiring companies to invest in particular assets. It amended
the asset matching and localisation rules introduced by the First Life Directive so that these
applied across all member states4. It also permitted the required solvency margin to be
covered ... by subordinated loan capital for the first time5. This was not subject to the consent
of the prudential competent authority under the Directive but such consent was nonetheless
made a requirement in the UK, again implemented by means of the issuance by the prudential
competent authority of an order under section 68 of the Insurance Companies Act 1982."
The UK authorities further explained in WE32 that 3LD "prohibited the prior approval by the
prudential competent authority of products or premium rates6, instead relying on the required
solvency margin, the rules concerning the technical reserves and the valuation of assets.... to
afford adequate protection to policyholders... Whilst the Third Life Directive permitted
Member states to impose explicit reserving requirements for terminal bonus, it did not require
this.7"
In WE43 policyholder Mr. VINALL claimed that "the regulator failed in his duty and then
1
"The directors of a with-profit office declare periodic bonuses intended to reflect the underlying trend of
investment performance. In this way with-profit investors are protected to some extent from market swings.
Many with-profit offices reinforce this by maintaining an ‘estate’ of surplus assets, which belongs to no one. This
enables such companies to continue to declare bonuses during market falls." (WE34, page 1).
2
see WE32, para.66-67.
3
see Art.18 3LD, transposed by Regulations 58-75 of Insurance Companies Regulations 1994.
4
see Art.18 and Annex I 3LD, transposed by Reg. 27-33 of Insurance Companies Regulations 1994.
5
see Art.25, para.1 3LD.
6
see Art.29 and 39 3LD.
7
see Art.18 3LD.
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compounded the problem by giving policyholders misleading information." He recalls in large
detail his frustrating experience in contacting the FSA in 2001, following the increasing
number of reports on Equitable Life, in order to obtain some reliable information and to
establish the truth about the Company's financial position. After allegedly having been told by
a member of the FSA Equitable supervisory team that in relation to the solvency and reserve
levels of Equitable "they could see no cause for concern", Mr. VINALL reported that the FSA
staff would not take his questions seriously and had even hung up on him. Written complaints
were answered concluding that he had no grounds to claim the FSA had acted
unprofessionally, a finding repeated by the FSA Complaints Commissioner. In his view, the
FSA's refusal to provide accurate information to the policyholder led him to stay with the
company longer than he should have, with the consequence of having to pay a 20% penalty
when leaving the company.
In an e-mail of 7 June 2006 (annex to WE43) the Office of the UK Parliamentary Ombudsman
confirms to Mr. VINALL they were "aware of the complaints having been made by many
individuals ... that they had been reassured by the FSA that there was no reason to be
alarmed as to the solvency of the Society."
Among a number of allegations that UK regulators (in particular HM Treasury and FSA)
knew already in 1998 of a potential GAR problem at Equitable but took no action, an article
in SAGA magazine1 (September 2001) cited a leaked memo from a civil servant to the FSA
managing director, dated 5 November 1998: it expressed concern "about whether Equitable
had the reserves to pay its guaranteed annuities. The information received to date is
unconvincing and raises serious questions about the company's solvency2."
In WE-FILE17, Mr. HARDING specifically points out alleged regulatory failure subsequent
to the House of Lords ruling (20 July 2000), as "it may have been too late to save the
Equitable in the absence of a cash injection from the Government, (but) it was not too late to
ensure that the rights of non-GARs were also considered before transferring wealth from one
policyholder to another."
Commenting on the controversial policy cuts in 2000/2001, WE-CONF8 states that "the
decision on the policy cuts, and how these were to be distributed, was one for the Society's
board to make. The FSA would only have grounds to intervene if the proposed cuts breached
either the contractual rights or the reasonable expectations of policyholders in general or any
class of policyholder ... But the 'policy value' EL made available to its policyholders were a
combination of the contractual value and the (discretionary) final bonus ... In this case the
cuts reflected the poor investment returns over 2000 and 2001 and were broadly in line with
the falls in that period that occurred in the major investment markets."
Referring to allegations of untimely assessment of possible consequences of the Hyman
litigation, WE-CONF8 states that "the FSA considered the decision to seek judgement on a
test case in the courts was reasonable, given that EL was faced with an increasing number of
complaints from GAR policyholders. Rather than dealing with these complaints individually,
1
'Saga Magazine' was originally a newsletter focused on providing value-for-money for people aged 50+; today
it is a publication reaching over 1.25 million readers each month (source: www.saga.co.uk).
2
see WE53 annex N-1.
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EL wanted the certainty of a precedent", recalling how Lord Penrose had also found "no
reasons to criticize the Society's board or executive management for taking steps to test the
legal issues that had arisen1" It concluded saying that the EL board had "carried out
contingency planning for a wide range of possible outcomes, identifying that in the worst case
it would have to seek a buyer for the business."
Finally, alleging regulatory failure by UK Regulators, WE-CONF25 claims, with the support
of detailed legal arguments, that the UK regulators "could and should have intervened, both
before and after July 1994, resorting to powers provided under Section 45 of ICA 82", to
rectify the serious deficiencies in EL's conduct of business due to over-bonusing and
provision of GARs.
In particular, after 1 July 1994, they could have "taken the view that the deficiencies in the
conduct of the Society’s business were so grave as to justify the giving of a direction under
section 11 of the Act (as amended), on the ground of the absence of sound and prudent
management. Having done this, the regulator could ... have made use of the power conferred
by section 45(2)(a) to prevent or restrict the payment of final bonuses. The giving of a section
11 direction to Equitable would have been a very drastic step; but it is one the regulators
might well have considered taking, on the basis that ... Equitable was voting and paying
bonuses well in excess of assets (that is, outgoing policyholders were being paid more than
the proportion of the assets properly attributable to them), relying on “goodwill” and/or the
expected generation of future cash-flows to bridge the gap ... As there seems to be no doubt
that GARs gave rise to a legal liability on the part of Equitable, they would therefore have
had to be taken into account in any consideration by the regulators of section 45(2)(d) and
section 35A ... The most obvious action which the regulators could have required Equitable to
take, not involving the prohibition in sub-section 45(2), would have been to require the
Society to put a stop to the very practice that was producing the reasonable expectations on
the part of policyholders."2
WE-CONF25 concludes by stating that "such a requirement would clearly have fallen
within the scope of the powers and duties of the prudential regulator, as deriving from the
need to have regard to the reasonable expectations of policyholders and the Society’s ability
to fulfil them ... All in all, it seems to me that had the regulators, in recognition of a serious
problem of over-bonusing, waved a big stick at the Equitable board it is very unlikely indeed
that nothing would or could have been done about the problem."
1b)
Alleged obstruction by UK regulators and collusion with EL
An even tougher stance was taken by policyholders Mr. CHASE GREY (WE9) and Mr.
WEIR (WE6), arguing that, in their opinion, there was collusion and obstruction by the
regulators to conceal their regulatory failure and responsibilities.
In particular, Mr. CHASE GREY (WE9) claimed that "the introduction of the non-guaranteed
with-profits policy in 1987constituted a conspiracy to defraud, as defined by English Common
Law. The deficient capital position of ELAS and the conspiracy to defraud were discoverable
1
2
WE16, chapter 1, para.120.
see WE-CONF25, para.9-12, 18-20.
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by the Treasury and/or FSA by reasonable inquiry. The British Government ... has
consistently acted by obfuscation and obstruction to conceal its failure of regulation."
WE-CONF6 claimed that "over a period of approximately 15 years (1987-2001) both the
Society and the regulatory organisations set over it, consistently acted in ways designed to
confuse and deceive policyholders, whether actual or prospective."
Mr. NASSIM (WE7) specified that "having turned a blind eye to gross solvency risks in 199092, the Regulator adopted thereafter a self-protective policy of denial, to conceal the
maladministration that had taken place in previous years, and to absolve itself of
responsibility when the collapse of the WP Fund eventually manifested itself. It colluded
throughout the period 1996-2002 in attributing the circumstances leading to the closure of
the WP Fund to problems with Annuity Guarantees, rather than the earlier and far more
serious over-bonusing of 1982-87."
In WE8 Mr. NASSIM concluded that "when the GAR crisis was precipitated by the House of
Lords judgement, there was widespread consternation among the many parties with an
interested responsibility in the matter. Naturally enough, none of them can have wished to be
held any more accountable for the situation than the emergent facts might ultimately dictate.
The overall pattern of events strongly suggests that their first instincts were to review and
cover their respective positions, such that their obligations to manage the situation positively
may have taken second place. In the case of the Government, Treasury and the regulators this
was particularly unfortunate ...".
Additional allegations of incompetence and/or collusion were made by Mr. JOSEPHS (WE69)
claiming a "multiple deliberate frauds on the part of Equitable Life against its customers,
over a period of approximately 15 years. Since the key information pointing to those frauds
was available in the Regulatory Returns over an extended period of years, we must also
conclude that the Regulators were guilty of gross regulatory failure, in failing to draw
Ministers’ attention to what was happening and in failing to use their extensive powers to
correct the situation."
Thus, fraud was allegedly permitted to happen by regulators either "due to sheer
incompetence, flowing from the dysfunctional organisation structure under which the
regulators were required to work, combined with inadequate training and supervision, or due
to collusion, most probably in the form of an informal and inadequately considered
Ministerial instruction to afford Equitable Life some temporary exemption from the strict
application of the prudential regulations ... The fact that such an instruction would have been
unlawful might explain why it was never rescinded!"
WE69 continued claiming that "Equitable introduced the ill-defined with-profits annuity in
1987 and represented that it was a low risk product, despite the immediate and ongoing risks
to the WP Fund: a competent and energetic regulator would have discovered what Equitable
were really doing and would have acted by 1990 at the latest to protect the solvency of the
Society and to address the serious threats to Policyholders’ Reasonable Expectations. One of
those expectations was simply that Directors should run the business honestly and in such a
way as to deal fairly between various types and generations of policyholders". In conclusion,
Mr. JOSEPHS asked how "the regulatory departments, containing actuaries and other
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insurance experts, failed for 15 years to detect the strong stench of fraud which surrounded
Equitable’s activities, or if they did detect it, how they avoided any effective action going after
the source of that stench."
In H11, Mr. BRAITHWAITE stated that he had no doubt that "the depth of potential
catastrophe was recognized (in 1998 by the UK Treasury). I believe that since then the overarching plan has been to deny culpability, avoid compensation and to cause delay after delay
..." He further claimed that "immediately following the Penrose report's publication, the FSA
granted consecutive waivers to Equitable to ignore complaints, whilst an orchestrated
response was being planned behind closed doors to see off potential claims arising from
Penrose", and subsequently "refused to publish its post-evaluation on the Penrose report and
merely announced in July 2004 its conclusion that 'Penrose-related claims were unlikely to
succeed'." He added that collusion between the Treasury, the FSA, EL and the FOS1 "has just
been categorically confirmed by two damning UK Treasury e-mails with dates in June 2004
obtained under a Freedom of Information request."2
Finally, WE-CONF16 questioned the FSA's "highly selective interpretation of 'confidentiality'
in the EL case", preventing it from informing policyholders whether a requested investigation
on the EL case had been set up or not , while at the same time the FSA website gives access to
press releases disclosing FSA investigations being conducted as well as their progress.
Countering these allegations, WE-CONF8 emphatically dismissed any claim or allegation of
'collusion' between the regulators and EL, describing such accusations as "very serious".
However, "not being aware of any evidence that would support such a claim, there is no
question of any collusion having occurred." Referring to allegations of collusion presented
by policyholder groups, the current Equitable Life Chief Executive Mr. THOMSON squarely
dismissed any "intriguing picture of conspiracy. In the absence of any verifiable evidence this
should remain one man's view of events."3
1c)
Claims of Regulators' industry bias
A number of witnesses (Mr. LAKE (H1), Mr. BRAITHWAITE (H1, H11), Mr. BELLORD
(H2), Mr. JOSEPHS (H2), Mrs. KWANTES (H7), Mr. SCAWEN (H3); Mr. SEYMOUR
(H7)) repeatedly claimed a strong industry-bias of the, supposedly independent, UK life
insurance regulators. In their view, this factor has prevented, or at least affected, their
impartial assessment of Equitable Life's operations and timely action to prevent its downfall.
In his oral testimony, Mr. JOSEPHS (H2) asserted that, starting from the 1980s, the UK
prudential regulatory system "left effective control in the hands of the industry, in spite of
giving the appearance of proper regulations". This would have lead to a weak regulatory
environment that proved unable to provide investors with effective protection.
Confirming statements were presented by Mr. LAKE (H1) and Mr. BRAITHWAITE (H1,
1
The Financial Ombudsman Service.
see also oral evidence by Lord Neill (H11) quoting the email as "seeking to' provide FOS with a basis' for
considering Penrose-related complaints and that discussion to this end would take place between the FSA and
the FOS in the week following 18 June 2004."
3
see WE-CONF5.
2
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H11), who considered UK regulators to be "too industry-oriented and not sufficiently
consumer-oriented" and claiming that "the FSA perceives its customers as being industry
firms."
Allegations of being industry-biased were firmly rejected by the FSA representative
Mr. STRACHAN (H4) calling "entirely misplaced such concerns, that the FSA would
somehow be 'in the pocket' of the firms it regulates: we are a statutory regulator established
by Parliament."1
1d)
Claims of Regulators' 'light touch' regulatory policy
In order better to specify the 'light touch' nature of the UK regulatory regime, policyholder
Mr. SEYMOUR (H7) quoted the UK Treasury2 commenting on the bill creating the new FSA:
"There will be a light touch where possible ... The Bill avoids over-burdensome regulation
that would serve only to stifle innovation and to increase consumer costs. Instead the FSA will
be under a duty to demonstrate that the burdens that it seeks to impose are proportionate to
the benefits that will result."
Another petitioner, Mr. BELLORD (H2), also insisted on the "very cosy relationship between
regulators and EL", highlighting some findings by the Penrose Report that suggest that
reports available to the Government Actuary's Department (GAD) dating back to the late
1980s had already hinted at Equitable Life's dangerous business practices but had remained
totally unheeded by the GAD3.
A 'light touch attitude' exudes from a letter of January 2001, i.e. just weeks after the mass
resignation of the EL board and its closure to new business, to the German regulator BAV. In
this letter, the FSA reiterated the point that "EL remains solvent, existing policies remain valid
and it is able to meet its contractual obligations to policyholders." It even claimed that "many
of the press reports in relation to EL have been inaccurate and speculative" and added
peremptorily that the FSA "will not be requiring the company to provide a new valuation."
Or, as summed up by policyholders' representative Ms. KWANTES (H7): "I think the truth
was the regulators were asleep at the wheel. They appeared to stand in awe of Equitable and
handled it with kid gloves ... If the regulator was aware that Equitable had problems why
didn't they say something? If they were not aware, they were not doing their job of regulation
properly."
These allegations, in particular the "lack of challenge to EL's senior management by the UK
regulators" were emphatically rejected by WE-CONF8, which referred directly to the
findings of the First Parliamentary Ombudsman's report4. It equally dismissed any claims of
1
Allegations that the FSA could be (or have been) too 'industry-biased' in its supervisory and regulatory
operations had also been judged "unfair" by expert Mr. McELWEE in H3.
2
Official Report, 28 June 1999; Vol. 334, c. 39.
3
see also 'timeline' in Section III.2.6 of this Part.
4
sections 168-170 and para.9 of the summary of findings, claiming that the FSA (with GAD) could not be said
to have addressed the GAR reserving issue and any misrepresentation of EL's financial position "in anything less
than a resolute manner", that their approach could not be described as 'passive' and that "FSA continued to insist
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inaction in investigating the responsibilities of EL's auditors Ernst & Young, an issue
considered to be "a matter for the professional bodies". Equally dismissed were claims of not
preventing EL management from engaging in legal action against its auditors, on the grounds
that "EL had a discrete set of legal and fiduciary obligations to its policyholders and was
entirely responsible for its own decisions."
1e)
Claims of Regulators' excessive 'deference' to EL
In H5, Mr. BAYLISS described how an attitude of deference by the regulators towards
Equitable Life existed at the time, due "to the fact that Roy Ranson instilled – and it was him
principally as an individual – the huge belief that Equitable could do no wrong. It oversold to
itself and to its 300 salesmen. It was not criminal until the end, but it was mismanagement
and it was not halted by the regulator as it should have been ... This was down to Equitable’s
stature and the value it was perceived to have in the marketplace. It was supposedly the ‘good
company’, and better than the others, so much better than the rest ... I do not think we have
finished the learning curve ..." Not excluding financial sector company failures in the future,
Mr. BAYLISS concluded saying that "I do not think there will be another one entirely related
to the arrogance of the management and the tolerance of that arrogance. The way in which
Equitable behaved and treated the regulator was really quite extraordinary."
Concerns that the FSA might have been 'intimidated' by the name and authority of Equitable
Life were partly upheld by EL salesman Mr. LLOYD (H5) when stating that "I am absolutely
of the view that the strength of the board’s position and its authority when it came to
discussing Equitable’s affairs with the regulators and our own auditors, probably did, to
some extent, intimidate the regulators into agreeing with this long-established mutual life
office, which had invented the term ‘actuary’ and possibly knew more about it than they did ...
Looking back now, I think somebody should have been sitting on Mr Ranson’s shoulders ...
and saying, ‘No, we are not accepting your word for things, we want a full explanation, we
want to understand how this works’. I cannot understand now why nobody – regulators,
auditors or the board – could sit down and work out what eventually happened ... I cannot
imagine how they were allowed to operate without that sort of analysis and somebody saying,
‘Wait a minute, this could go badly wrong’. I cannot understand how we, the sales force, were
allowed to go on promoting the with-profits fund from 1997-1998 when the board had already
had conflicting legal advice that implied that it might not actually win the case, it might have
to honour the GARs, etc., etc. We should have all been warned at that point."
However, Mr. LLOYD's competence to issue the latter statement has been questioned and
challenged by the EL executives1 on the grounds that, being a simple sales representative, he
would have lacked any first-hand knowledge or experience of Equitable Life's contacts with
regulators.
Referring to the controversial sale of 'managed pensions' by EL, Mr. BAIN quoted in WE72
an English IFA as saying “the quality of advice the FSA seemed to require from Equitable
was different from what they required elsewhere." This point was confirmed by
throughout that Equitable conform to their full reserving requirements in the face of strong resistance from
Equitable."
1
see reply of the former EL CEO Mr. HEADDON (WE45) and WE-CONF8.
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Mr. JOSEPHS (WE69) stating that "Investors Association has heard from more than one
insurance executive that other companies, usually non-mutuals, were regulated far more
strictly than Equitable Life".
Another clear hint of 'deference' to EL is found in a letter of 7 August 2000, where the FSA
replies to the German regulator BAV asking for an update on EL after the House of Lords
ruling. BAV was informed that EL "remained solvent", adding in very optimistic terms that
"the company is putting itself up for sale and ... there are not expected to be any shortage of
companies interested in acquiring Equitable Life, because of its strong reputation in the UK
industry for efficiency ... The management of the company appear to be handling the situation
effectively and we are satisfied that in doing so they are seeking to act in the best interests of
policyholders." (WE-CONF9)1
Finally, WE75 related of a complaint against the FSA's ratification of Mr. Treves'
appointment as chairman of EL in 2001: Mr. Treves is described as "having far too many
competing chairmanships and being over retirement age, having no experience in life
companies ... and having presided over massively expensive failed legal actions." The FSA is
reported taking note of these concerns but without giving any further justification.2
1f)
Claims of Regulators' drive to avoid EL's insolvency
While Equitable Life appears to have deliberately exploited a possible systemic weakness of
the UK regulatory system, the question arises if regulators should or could have recognised
this intention but did nothing to prevent its crisis, and then - when it was too late - opted for a
solution avoiding the Society's insolvency. This choice, possibly not in the interest of the
industry or the financial marketplace as such as insolvency might have burdened the existing
financial compensation schemes and hurt confidence in the UK financial market as a whole,
might have negatively affected policyholders, otherwise falling under such a scheme.
In his testimony, Mr. WEIR (H2), representing a policyholder action group, claimed a
collective effort by the "UK Government to keep Equitable Life afloat, concealing any
culpability on the part of UK regulators and avoiding insolvency at any price". He also
accused regulators of collusion with the board of Equitable Life to "ensure that the losses ...
are borne by investors. This meant avoiding any costs to the Financial Services
Compensation Scheme (FSCS), to the rest of the financial services industry (and) to the
Treasury." Mr. JOSEPHS (H2) added that "powerful external forces, not least the Treasury
and the FSA, were in favour of continuing with the existing strategy."
Referring to this issue and to the general question of Equitable Life's alleged technical
insolvency, the UK Treasury representative Mr. MAXWELL (H4) made a point to clarify that
"Equitable Life decided to close to new business: the society did not go insolvent." The FSA
representative Mr. STRACHAN (H4) dismissed "any misperception that Equitable Life has in
some sense 'collapsed' or 'failed' in solvency terms. This is not the case: at all times the
company has remained solvent. At no time has Equitable defaulted on any contractual or
1
This statement was made just 4 months before EL's closure for new business and the resignation of the EL
board!
2
see WE75, point b).
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guaranteed liability to its policyholders. In addition, in each of its regulatory returns it has
reported that it is currently meeting its regulatory solvency margins."
In fact, in November 2002, after Equitable Life had warned it may be unable to meet the
FSA's required minimum capital margins, the FSA had rejected a call to liquidate Equitable
Life on the grounds that policyholders would be worse off, without giving more specific
arguments.
In H8, the EL CEO Mr. THOMSON claimed that "the option for the Society to become
insolvent was dealt with in the documentation for the Compromise Scheme in 2001, where it
was obvious then, and remains so now, that liquidation would have produced a much less
satisfactory outcome for policyholders", but again without specifying any further the
arguments supporting his position.1
1g)
Double role of Equitable Life CEO and Appointed Actuary
The generally accepted definition of 'prudential supervision' in the UK included "ensuring that
the directors and major shareholders of a life office were fit and proper."2
On this point, it has been established that Mr. Ranson had become Chief Executive of
Equitable Life in 1991 without relinquishing his role of Appointed Actuary until his
retirement in 1997. EMAG representatives and a large number of policyholders' complaints
have referred to it, claiming that this fact, as well as the regulators' inaction and refusal to
challenge Mr. Ranson's double role, had been prejudicial to their interests. A similar
allegation was presented by Mr. CHASE GREY (WE9), who accused the FSA on this issue of
gross negligence and failure in their regulatory duty.
WE-CONF25 equally blamed UK Regulators for not intervening on this matter by using
powers provided to them by Section 45 of ICA82. In particular, it stated that "alternative
steps which the regulators could have taken under section 45 include, for example, requiring
Equitable to strengthen its management, and/or requiring it to split the roles of Chief
Executive and Appointed Actuary, both of which were occupied by Mr. Ranson in the early
1990s."
Mr. NASSIM (WE7) confirms that "the regulators and GAD allowed successive chief
executives/managing directors of ELAS also to hold the post of Appointed Actuary3, despite a
recognition of the potential for conflict of interest in this position, and the fact that it
completely undermined the basis of the regulatory process which was founded on the
separation of powers between the AA and the rest of the Executive."
Countering these allegations, Treasury representative Mr. MAXWELL (H4) pointed out that
the figure of the Appointed Actuary did not derive from, nor was it foreseen in, any part of
1
Asked on this issue as an independent expert, Mr. Schneiter (Swiss insurance regulator) also stated that in his
opinion "insolvency of an insurer should only be seen as a last resort measure" (H6).
2
see ES-1, page 9: "A life office had to notify the DTI any change of director, controller or manager and the
DTI had the power to object the appointment of a new managing director, director or controller." Technically
however, UK law did not formally exclude cumulating both roles.
3
Mr. Headdon had also been both CEO and AA of Equitable Life for some time.
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EC legislation. "The Third Life Directive does not refer to an individual called an 'Appointed
Actuary'. The question of whether an Appointed Actuary could take on that particular role is
therefore not a matter for the Third Life Directive. It was a common arrangement with a
number of other life insurance companies that the Appointed Actuary played that sort of role
within the UK system ... Things move on, but within the terms of the Third Life Directive,
there was no particular reference to the role of an Appointed Actuary. Indeed, the tests the
regulator could apply as to who was fit and proper to carry out the role of a Chief Executive
– to be managing, to be a director – of an insurance company did not include a reference to
their role as an actuary."
Following Mr. Headdon's decision to leave Equitable Life on 1 March 2001 the FSA has
"discouraged the suggestion that (the new CEO) Mr. Thomson should combine the two roles,
and that view was accepted by Equitable." Changes to the regulatory regime since then have
included "abolishing the role of the Appointed Actuary in favour of requiring boards and
senior management to take responsibility for actuarial issues and bringing these issues within
the scope of the firm's external audit." (WE-CONF8)
Asked on this issue as an independent expert, Mr. SCHNEITER (H6) reported that Swiss law
would currently not forbid the double role of CEO and AA. He added however that the Swiss
regulator would consider such an issue as a clear case of "bad corporate governance", leading
to a potential conflict of interest, and that it would have to be addressed accordingly. In any
case, the fact that a chief executive covered the roles of CEO/AA in the same company would
immediately trigger a detailed scrutiny of the company's overall policies by the Swiss
insurance regulator. A final judgement on the compatibility of the double role would then,
however, be dealt on a case-by-case basis.
1h)
Adequacy of resources available to regulators
On the subject of structures and resources available to the UK insurance regulators, Lord
Penrose found that "the DTI insurance division was ill-equipped to participate in the
regulatory process. It had inadequate staff, and those involved at line supervisor level in
particular were not qualified to make any significant contribution to the process. Insurance
division regulators were fundamentally dependent on GAD for advice on the mathematical
reserves, implicit items, technical matters generally, and PRE, and were not individually
equipped with specific relevant skills or experience to assess independently the Society's
position in these respects".
He added that "the staffing levels available to the prudential regulators varied, but the number
of staff with direct responsibility for the Society and their grades within the civil service
remained broadly constant ... Increased resources might have improved the chances of
identifying problems, but ... Government required a 'light touch' approach to regulation, and
allocated resources accordingly. "(WE16, par. 39, 158 and 159)
Mr. NASSIM (WE7) claimed that "the regulators were not always sufficiently resourced, and
did not all possess the necessary skills, to make an effective contribution to the regulatory
process and responsibly exercise discretionary powers as intended by Parliament from 1973
onwards. As a consequence they did not properly undertake their functions."
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Referring to evidence in the Baird report, Mr. LAKE (H1) also claimed that the insurance
regulators were seriously under-resourced throughout the 1990s and accused the UK
Government of contravening Articles 15(3) and 23(3) of the 1LD as amended by the 3LD,
which required that "the powers and means be sufficient to allow the competent authorities to
be able to prevent or remedy any irregularities prejudicial to the interests of the policyholders, which was not done in this case." Likewise, "resources provided had to enable that
the competent authorities of the home Member State shall require every assurance
undertaking to have sound administrative and accounting procedures and adequate internal
control mechanisms. Again, this provision was not correctly followed."
2.
The GAR Problem
The handling of the problem related to Guaranteed Annuity Rates (GAR) appears at the core
of evidence and complaints put forward to this Committee of Inquiry by petitioners and
policyholders, in particular regarding the alleged failure by regulators to recognize the GAR
risk potential for EL's solvency and their subsequent failure to adequately inform and/or warn
prospective policyholders about this risk exposure.
2a)
GAR Timeline
1957
Equitable Life began selling with-profits pension annuities with
'guaranteed rates' (GARs) fixed to specific assumptions as to interest rates
and life expectancy. GAR policies were sold until 1988; with-profits policies
offering 'guaranteed interest rates' (GIRs) were sold until 1996
1970-1982
UK high-inflation years (retail inflation rate 10-22% p.a.)
1990
UK inflation drops significantly, with long-term gilt yields falling
accordingly. Insurers with large books of GAR policies saw their liabilities
increase dramatically: EL, holding minimum reserves and giving maximum
payouts, was to be particularly badly hit1
1993
Market current annuity rates fell below the GAR annuity rates promised
by ELAS, thereby raising substantially the cost to ELAS of providing GAR
pensions; Differential Bonus Policy (DBP) applied
7.9.1998
EL writes to Denton Hall, the Society's solicitors, seeking legal advice on
the GAR and Differential Bonus Policy;
GAR formally becomes an issue
Jan.1999
Hyman litigation is launched in the UK High Court
S&P downgrades EL's credit rating from AA to A+/watch negative2
20.7.2000
House of Lords ruling ended the Hyman litigation1
1
2
see also the issue of "Managed Pensions/Income Drawdown" as detailed in WE72.
see WE-FILE22.
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2b)
Background information
For a better understanding of the GAR issue, it may be useful to identify different groups of
policyholders involved:
- GAR policyholders, i.e. those having a guaranteed annuity option on their policy
- non-GAR policyholders, i.e. those holding policies lacking this option
- Late-Joiners (LJ), i.e. policyholders who bought EL policies after 30 September 1998
The market forces leading to the GAR problem have been extensively researched and clearly
identified: they mainly relate to the rapid and unexpected fall in UK interest rates in the early
1990s. WE29 recalls how "in late 1993 and in 1995, open market rates fell below GARS and
have remained below ever since. In addition, the assumptions concerning life expectancy used
to determine the size of the GAR pension payments were not revised in the light of
improvements in mortality that had taken place since they had been set, further raising the
cost of the pensions. The Board at the time did not take these extra costs into account when it
awarded annual bonuses and all members’ policy values (both GAR and non-GAR) increased
at the same rate."
In an effort to correct this adverse market movement, "the Board corrected for the extra cost
of the GARs through a ‘differential final bonus policy’ first introduced in 1993, which it
considered was within the discretion it had2. The intention was to declare final bonuses that
made the value of total benefits broadly equal to each policyholder’s notional share of the
with-profits fund ... Those policyholders who elected to take the GAR option from ELAS
received a lower final bonus than those policyholders who, despite having a GAR option,
elected to take their pension benefits in a different form ... but at the lower market rate ruling
at the time. The Board thought that this strategy was legal; the Institute of Actuaries and
Treasury Insurance Directorate agreed." (WE29)
As a result of complaints from policyholders, who argued that the differential bonus policy
rendered the GAR option valueless, EL initiated a legal ‘representative action’ in the High
Court to resolve the issue, which became known as the 'Hyman litigation', ending with the
final House of Lords ruling of 20 July 2000. "The case ended up in the House of Lords, which
ruled that ELAS could not apply a differential bonus policy to any class of policyholder,
whether GAR or non-GAR. Those GAR policyholders who had exercised their GAR option
between January 1994 and 20 July 2000 had to be given the same final bonus as the GAR
policyholders who had not taken the GAR option and then the GAR had to be applied to the
revised terminal policy value. Crucially the House of Lords also ruled that the cost of meeting
the GAR liabilities could not be ‘ring fenced’ within the class of GAR policyholders." (WE29)
Following this ruling, the total cost to EL was estimated to be 25% of GAR policy values, or
1
WE-CONF21 confirms that EL continued to take in new business after this date until it closed down to new
business on 8 December 2000. For details on this period see also Chapter 18 of the Penrose report (WE16).
2
discretion power claimed by EL management under Art.65 of the Memorandum and Articles of Association of
ELAS.
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£1.5 billion1. This sum had to be taken from the single with-profits fund that invested both
GAR and non-GAR premiums. "On 20 July 2000 25% of the with-profits fund represented
GAR policyholders’ claims and 75% non-GAR policyholders’ claims. So the House of Lords
ruling meant that an ‘economic transfer’ of claims of £1.1 bn (75% of £1.5bn) from non-GAR
to GAR policyholders had to be implemented."(WE29)
WE-CONF2 underlined how "the GAR problem was compounded by the fact that historically
the Society had operated a policy of maximizing bonuses and not building up a reserve. The
Society's argument was that commercially a reserve of only £50m was required, based on the
fact that... only a trivial percentage of GAR policyholders exercised their GAR option. The
theoretical exposure was calculated at £170m."2 It also reminded that EL's statutory accounts
for 1998 and 1999 included "provisions of £200m for 'any additional liabilities which may
arise through clients choosing to exercise GAR options under their policies'. It is important to
bear in mind that these reserves were not made against failure in the Hyman litigation, they
were against liabilities expected even if the Society was wholly successful in that litigation."
It appears that EL failed to react to market developments by not providing any consistent
hedging or cover against the risk of GAR optioned being taken or against defeat in the Hyman
litigation. In 1999 EL took out a financial reinsurance over £700 million to cover immediate
payments required on the exercise of GAR options, "but this reinsurance was never intended
to be claimed on. By its terms the reinsurance could only respond if the Society's bonus policy
remained unchanged. Once the differential bonus policy (DBP) was ruled to be unlawful, the
policy would be void. In other words, the reinsurance did not touch the question of the cost to
the Society of providing benefits for GAR policyholders in the event the DBP being held
unlawful." (WE-CONF-2)
2c)
Claims of Regulators' incompetence in failing to recognize the GAR risk
Delivering a technical analysis of the GAR issue, WE58 highlighted how "between 1997 and
end 1998, long gilt yields fell very sharply indeed, causing there to be a sharp increase in the
extent to which policyholders were "in the money" (and life offices were in trouble) with
regard to GARs. When, in the early 1990s, the GAR problem began to lap at Equitable's
shores, the Society (unlike the generality of its competitors) seemingly decided not to make
reserves, but chose to deal with the problem in an entirely different way ... Equitable's
conduct would appear to have been the result of its philosophy of not holding substantial
excess capital. Quite simply, the Society knew it could not afford to honour its guaranteed
annuity promises and, accordingly, sought to construct its bonus rate regime so that the
guarantees would be worthless."
As reported in WE58, EL had devised as possible solution to charge policyholders for the cost
of providing them a GAR, implicitly deducting it from the (discretionary) final bonus: "it
would appear possible, depending on the particular circumstances relating to the contract,
that any terminal bonus added at maturity could be somewhat lower than for contracts
without such options or guarantees, and that this terminal bonus could in some cases be
this sum comprising £200m to cover the lower GAR pension payouts between January 1994 and 20 July 2000
and £1.3bn for correcting future shortfalls.
2
see also para.4.15.3 of the Baird Report (WE17).
1
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applied at current annuity rates ... Equitable's Nemesis came in the form of an independent
financial adviser, Mr Bayliss, who, being a specialist in the retirement annuity sector, was
instrumental in spreading the word that Equitable, in his opinion, had been treating its
pension policyholders unfairly by juggling pension maturity values and annuity rates so as to
deprive policyholders of the true value of their guaranteed annuity options. The agitation of
Mr Bayliss and others led to the litigation that eventually saw the Society defeated in the
House of Lords. Thus, EL's seemingly sophisticated approach and its dismissal of the GAR
issue as being relatively trivial and having an impact of no more than £50 million ... caused
(policyholders) to be mightily concerned to learn that a "£50m bagatelle" was, in fact, a £1.5
billion terminal disaster. " 1
Mr. NASSIM specified in WE7 several alleged failures of regulators "to fully assess the risks
inherent in Equitable Life's policies and to intervene accordingly:
- From 1973 onwards the regulators failed to react to ELAS making no explicit reservation
for its increasingly dominant bonus form (terminal bonus), and did not examine the position
from the realistic aspect required under a proper or reasonable interpretation of PRE;
- Despite contemporary informed actuarial comment the regulators failed to scrutinise the
“With Profits Without Mystery (WPWM)” actuarial and insurance paradigm. Had they done
so, they would necessarily have discovered that it was in essence a rationalisation for
dispersal of its assets, and running a with-profits fund on an intermittently negative technical
solvency gap. Under the WPWM paradigm there was no prudently equitable assurance, or
real prospect of fulfilling policyholders’ reasonable expectations;
- From 1987 onwards the regulators allowed a with-profits fund to operate on a mostly
negative technical solvency gap which betokened liability for present and future policyholders
rather than profit;
- The regulators generally failed to appreciate the effects of conflicts of interest between the
Society’s private and corporate/institutional clients, and the GAD’s position in
recommending the Society as a civil service institutional pension scheme provider".
In his statement, Mr. SLATER (WE34) claimed that over more than a decade, the Regulators
failed to fully acknowledge the potential danger of Equitable Life's practice of "voting
bonuses in excess of the investment returns actually achieved and the similarly long history of
understating liabilities."
In his oral testimony, Mr. SEYMOUR (H7) claimed that by not accumulating funds to cover
for future bonuses during the years the financial markets performed well, Equitable Life had
de facto been supporting its liabilities by functioning like a pyramid selling scheme without
the regulator taking notice of it. "ELAS was declaring bonuses to show a higher level of
performance than the competition in order to bring in new funds to cover its immediate
outgoings. It was not maintaining a promised reserve fund ... The regulator could easily have
determined the existence of a pyramid scheme together with the absence of reserves and taken
remedial action as required by the directive. This was essential, particularly as the declared
presence of a reserve fund was a key selling point throughout the Community."
WE-CONF23 also accused the UK Regulators of negligence in recognizing and failure to
1
WE58, page 7-10.
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react to the GAR risk, stating that "any diligent investigation would have revealed the absence
of a GAR provision. The fact that the regulators did not act to close down Equitable Life or
enforce a substantial reconstruction encouraged the directors to do nothing and thus
compounded the losses eventually suffered by those who held policies on 16 July 2001."
In H5 Mr. BAYLISS stated that "there was no doubt that ... in the new regulatory regime of
the FSA, the returns were not adequate in terms of explaining the true situation or potential
liabilities that hid in those funds ... They had been buying Equitable’s story on solvency
margins for a very long time: as long as you are generating new sales to cope with it, then
you are OK. If your new business is big enough, you can backfill the hole ... The problem was
that the regulators realised there was a problem with GARs in 1998 and they did not know
what to do about it. As to the other question of intervention and when, the regulators were
aware through the Ombudsman, certainly in 1997 and 1998, that this was an issue. They had
the documentation that we circulated to the press, certainly in the summer of 1998, if they had
not had it earlier through individual clients sending it in ... I think they had the same problem
of wanting or not wanting to intervene."
However, in WE46, non-GAR policyholder Mr. STONEBANKS challenged some of
Mr. BAYLISS' evidence, asserting a clear divergence of interests between GAR and nonGAR policyholder groups and claiming that Mr. BAYLISS had been championing only for
the rights of the former group, bringing the GAR issue to court and by doing so eventually
leading to EL's downfall. "This was a mutual, equitable Society set up for the benefit of all
members, so I was appalled that Bayliss should be demanding more for some ... Mr.Bayliss
must have realised that if his demands were met then not only would Equitable have been put
out of business, but, by adding £1.5 billion to their liabilities and destroying their major
product, the Society would not have been worth rescuing. He must have known that if
Equitable Life met his demands then they would be put out of business. And as Equitable's
main product was unmarketable, there was no point in any other company taking them over.
Was Stuart Bayliss set up by other major LifeCos to put Equitable Life out of business? I
doubt if we will ever know, but this seems to me the only logical explanation for Mr. Bayliss'
actions. Equitable was a major and successful player in the UK pensions industry and I can
well understand that other LifeCos would like to see them go."
3.
Alleged Unfairness in the 2001 'Compromise Scheme'
When the 'Compromise Scheme' took legal effect (8 February 2002) after approval by the UK
High Court "there were still close to a million people with an interest in the with-profits
fund." (WE47)1. The scheme was meant to stabilize the with-profits fund by reducing
exposure to GARs, while at the same time eliminate the risk of legal action against EL for
mis-selling, claiming the potential risks of GAR liabilities had not been disclosed to them
when taking out their policies. As stated in WE80, the Irish Regulatory authorities were not
involved in the Compromise Scheme agreement process.
1
WE29, annex A.2 details: "as of 30 June 2001 there were 70.000 individual with-profits policyholders with
GARs, 415.000 individual policyholders without GARs, 105.000 GAR and 510.000 non-GAR policyholders in
group pension schemes".
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The terms of the Compromise were that “all and any GAR-Related Claims that each Scheme
Policyholder has and/or may have in relation to their GAR Fund and/or Non-GAR Fund ...
shall be waived and settled fully, finally and irrevocably”, excluding explicitly “any
complaint or claim to any ombudsman (including the Financial Ombudsman Service)”.
3a)
Timeline surrounding the 'Compromise Scheme'
20 July 2000:
House of Lords ruling, upholding the Appeal Court's ruling, declared
unlawful the payout of differential bonus levels on GAR policies (thus
forcing EL to put itself up for sale)
July-Nov. 2000:
Several companies considered a take-over of Equitable Life, but no
bids materialize1
8 December 2000:
EL closed to new business and increases penalty fees for withdrawing
funds to 10%2
20 December 2000: EL Board offered their resignation
5 February 2001:
Halifax agreed to pay £1 billion to buy EL's 'operating assets' (sales
force and non-with-profits policies), promising additional funds in case
a compromise is found over with-profits policies3
14 February 2001:
EL instructed Nicholas Warren, QC to examine issues arising from
GAR case
10 May 2001:
The 'Warren draft report' suggested non-GAR policyholders have
valid rights for mis-selling
16 July 2001:
EL reduced policy values by 16% (of end-2000 level)
WE-CONF16 claimed EL decided for a flat rate cut in policy value,
irrespective of their duration, instead of a cut to final bonuses4 as
1
WE58 explains how "Equitable's approach to cost controls and operating efficiency... meant that it was always
going to be peculiarly unattractive to a prospective purchaser (even leaving aside problems with guaranteed
annuities) for the simple reason that it had become so efficient and lean that there would be only very slim
profits to be generated for a shareholder were the Society ever to de-mutualise". Prospective buyers were also
deterred by the fact that "a fundamental value of Equitable (pre 8 Dec. 2000) of £2bn at best had to be set
against the estimated £4bn of required financial repair."
2
On 8 Dec 2000 Equitable Life lost its investment grade credit rating (AA/A+ held since 1993), as S&P
downgraded it to BB/Watch negative (WE-FILE22).
3
"Equitable Life certainly has not been "bought" by Halifax plc. The arrangements entered into with Halifax
were in respect of certain operations of the Society and did not involve the demutualisation of Equitable and/or
the transfer of its long term business to any person. Accordingly, Equitable remained a mutual life office owned
by its members." (WE58, page 13).
4
EL CEO Mr. Thomson (H8) claimed this decision was taken "to achieve greater fairness for all policyholders"
(no specifications given, ndr) "after having considered a range of options with the AA."
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recommended by the new Appointed Actuary Mr. Nowell, blaming
adverse stock market conditions.1
August 2001
EL denied access to the Financial Review2 to policyholders
20 September 2001: EL drafted the Compromise Scheme pursuant to section 425 of the
Insurance Companies Act 1985, based on a GAR buy-out and aimed at
stabilizing the company's finances; the scheme is subject to
policyholders' and High Court approval3
1 December 2001:
FSA became fully operational as UK single regulator
Formal Compromise Scheme Proposal was sent to policyholders
7 December 2001:
FSA publicly endorsed the Compromise Scheme in its Scheme
Circular4
11 January 2002:
Policyholders voted on the Compromise Scheme: approved if
endorsed by over 50% of individual policyholders representing 75% of
the value of both types of policies (GAR and non-GAR)
28 January 2002:
EL announced policyholders voted overwhelmingly in favour of the
deal (98% non-GAR, 99% GAR policyholders)
8 February 2002:
High Court approved Compromise Scheme which became
immediately operational; EL applied 10% exit penalty; Halifax
injected the promised £250 million into EL
15 April/1 July 2002: EL cut maturity value of with profits policies by 4% and 6%,
raising exit penalty to 14%; at the same time, the EL 2001 report
showed lavish bonuses paid to new Chairman and CEO5
1
This in spite of the FTSE-100 stock index declining only 6% between July 2001-April 2002 and EL's relatively
low equity exposure (46%). For further details, see WE-CONF16 (pages 3-4) claiming that "half of the policy
value cut derived from EL paying excessive bonuses for more than a decade".
2
EL CEO Mr. Thomson (H8) claimed that "the policy value decision was for the board, not for policyholders:
following the decision they were told policy values were in line with assets, so they were able to take an informed
decision, about whether to stay or leave."
3
see also letter of 29 October 2001 from EL to policyholder in WE-CONF19.
4
the FSA material included two opinions of Ian Glick QC and Richard Snowden and two opinions of Nicholas
Warren QC and Thomas Lowe given on instruction of the Society (WE-CONF2, para.3).
5
WE29, annex A.30 details: "Charles Thomson, who became CEO in March 2001, was given a bonus of
£275.000 in addition to his total remuneration package of £347.758 for the year to December 2001; Vanni
Treves, who took over as EL chairman in February 2001, was given a bonus of £250.000 in addition to his
remuneration of £58.750." On this issue Mr. Thomson explained in H8 that the decision to award these bonuses
was reached "by the EL remuneration committee, chaired by Sir Philip Otton, and unanimously endorsed by the
Society's Board. The Board agreed that the payments were appropriate, fair, justly deserved and certainly not
overgenerous." (see also EL AGM, May2002)
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In suggesting an explanation on how the need for the 16% cut in policy values of July 2001
had arisen, Mr. SLATER submitted a chart1 showing that, over more than a decade, EL had
not balanced its policy values with asset values, thus accumulating substantial deficits every
year from 1989 to 2000, with peaks of 28% in 1990 and 20% in 1994. As a result of this
"policy of declaring total bonuses in excess of actual investment performance encouraged
hundreds of thousands of innocent new investors and the Society expanded hugely. Equitable
Life's senior management clearly recognised the risks they were taking. On 27 June 2001 the
new board of directors heard Chief Executive Charles Thomson’s view of the level of surplus
he would have expected at the end of 1999. Thomson commented that at the beginning of
2000, the excess of policy values over the value of assets was approximately 3%, which would
have been within the acceptable range. In response to a question, Thomson confirmed that
under normal actuarial principles he would have expected there however to have been an
excess in the value of assets over policy values of perhaps 6-7% at that time. At the beginning
of 2000 the Society was short of assets (or had voted excessive bonuses) of about 10%
(3%+7%) or £2½ billion. The loss of the GAR case in July 2000 increased this shortage to £4
billion. This was approximately the amount recovered by the 16% cut of policy values on 16th
July 2001."2
Referring to the outcome of the Hyman litigation and its consequences, WE 46 cited Mr. Ned
CAZALET, an advisor to the UK Treasury on life insurance, saying of the GAR
policyholders: "They just shot themselves in the head. They could win a court victory. The
question is: What are the consequences of winning? The Equitable is left facing a possible bill
of £1.5 billion to cover the guaranteed annuity rates. It does not have that kind of money to
spare."
Wrapping up the GAR issue on a more informal note, Mr. CAZALET concluded: "Think of
the Equitable as a box of Smarties. The teacher promises a group of children four each. But
the tube is smaller than the teacher thought and, when the sweets are shared between the
whole class, there are only enough for three each. The disappointed group demands the
promise be kept. The only way to get the extra Smarties is by grabbing them from their
classmates. After a scrap, nothing remains but mushy chocolate and broken icing." (WE46)
3b)
The Compromise terms in detail
In practice, the compromise terms meant that:
- 70.000 GAR individual policyholders would get an increase of 17,5% in their policy value,
in exchange for giving up their rights to a guaranteed annuity rate
- 415.000 non-GAR individual policyholders would get an increase of 2,5% in their policy
value, in exchange for giving up their right to sue Equitable Life for mis-selling.
In WE29 Professor David BLAKE claimed that "the compromise scheme proposal
documentation of December 2001 (and the 2001 interim accounts) indicated to policyholders
1
2
WE34, page 2; data based on findings of the Penrose Report.
WE34, page 3-4.
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that the with-profits fund would face an uncertain future only if policyholders failed to vote
for the compromise scheme proposal that removed the problem with guaranteed annuities
(GARs). These documents gave no indication that, even if the CSP was approved, the withprofits fund would be close to technical insolvency." He added as a policy recommendation:
"in future, investors should only be permitted to participate in the same pooled investment
fund if they all get the same expected (or ex ante) return."1
Referring to the content of the Compromise Scheme proposition, WE29 reported that the EL
board had argued that "four principles underpinned its proposed solution. It must be fair to all
with-profits policyholder groups, easily understandable and implementable, as well as
acceptable to the High Court." The Board claimed that the Scheme satisfied these principles
in respect of GAR policyholders since it involved "fair value compensation to GAR
policyholders based on a ‘realistic estimate’ of the value of their legal rights given up ..., it
apportions the compensation to different GAR policyholders in accordance with their rights;
it reduces that compensation by the value of any possible claim for compensation given up by
the non-GAR policyholders; the compensation takes the form of a proportionate increase in
GAR policyholders’ policy values in both guaranteed and non-guaranteed form."2
In the event that the Compromise Scheme were not approved at the policyholders' vote, the
EL had board considered the following options3:
1.
2.
3.
4.
5.
Maintain the current position, matching GAR liabilities with hedging instruments
Entering bilateral agreements with policyholders
Apply to the court for a ‘reduction of contracts’ (Section 58 of ICA 1982)
Make suitable amendments to GAR policies4
Liquidate ELAS.
The Board decided not to recommend any particular one of these options, as it argued that
each of them had disadvantages. (WE29)
3c)
The independent actuary's report
Equitable Life had appointed an independent actuary, Mr. Michael Arnold5, to assess the
compromise terms. He stated however that it was his duty "to report to the Society alone ...
and no duty is owed to any policyholder of the Society. In particular, it is not intended that
this report constitutes advice to any policyholder." (WE-CONF9) He further specified that
"this arrangement has effectively isolated the specified German policies from the GAR
problems confronting all other with-profits policies. These German policies will not be party
to or affected by the Scheme."6
1
WE29, para.5 and 7.
see WE29, annex A.17-18.
3
see WE29, annex A.24-25.
4
For instance a 'Schedule 2C transfer' under ICA 1982 or a 'Section 112 transfer' of the with-profits business to
a third party under FSMA 2000 " (WE29).
5
for more details, see WE-CONF9.
6
The factual independence of Mr. Arnold was put in doubt in WE75 (point f), complaining that the EL board
had "exercised control over him by restricting his instructions and permitting him to disclaim any duty of care to
2
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In the report's summary, Mr. Arnold considered the terms of the Compromise to have been
established "in a fair and reasonable way from an actuarial point of view" (WE67) and that
"the Society has established the GAR cost on a realistic estimate basis ..." (WE29). He added
that "in the event that the Scheme is not implemented, a full reappraisal of the asset mix would
be required to establish a long-term stable investment mix which recognises that the GAR
problem will be likely to persist throughout the lifetimes of remaining policies and as a result
will cause an unsatisfactory solvency position to persist for the Society." (WE29)
He also warned that "the Scheme does not eliminate all potential risks related to guaranteed
benefits", adding that "it is recognized that the Scheme may be disadvantageous for individual
GAR policyholders ... close to retirement who may intend to exercise their GAR rights." His
conclusion was: "The principal advantage of the Scheme for non-GAR policyholders is that
the cost of the GAR rights is crystallized ... and the removal of such uncertainty will have
advantages to all with-profits policyholders and for the future management of the Society."
3d)
FSA's role in 'Compromise Scheme'
As the Compromise Scheme was proposed under Section 425 of the ICA 1985, the FSA had
no formal role in the process but, as a regulator, it had, under the FSMA 2000, the power to
take action if it considered it appropriate, in order to protect the policyholders' interests. The
FSA could also seek to be heard if the scheme was taken to court for formal approval after the
policyholders' vote.
In its assessment of the Compromise Scheme published on 7 December 2001 (WE67), the
FSA endorsed the terms of the deal, stating that "it had no reason to intervene to object to the
proposals being put to policyholders" and specifying that "the FSA is content that, in relation
to the relevant groups of GAR and non-GAR policyholders, the level of increase to policy
values is a fair offer in exchange for the GAR rights and potential mis-selling claims that
would be given up. While there are variations from person to person, within each relevant
group, we are content that there are no categories of policyholder within the groups who
would receive disproportionately greater or lesser benefits ..."
It concluded that the FSA "firmly believes that a successful compromise would, in principle,
offer the best prospect of bringing stability to the with-profits fund and improving the outlook
for concerned policyholders."
As far as the complexity of the proposed compromise is concerned, the FSA said it "believed
it was important that the Compromise put to policyholders should be clear and should
provide them with the information they need to form their own judgement about how to vote
on the proposals put to them." However, it acknowledged that "much of the Compromise
documentation sent to policyholders for the vote is complex ... We are content that it is
sufficiently clear to enable them to form their own view on how they should vote, in the light
of their individual circumstances."
policyholders, and subsequently provided him with highly remunerative work." The FSA subsequently noted that
"there had been no legal obligation for this appointment".
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The FSA further specified that it could not provide personal advice to policyholders, adding
that "where Equitable Life policyholders believe they require assistance in deciding how to
vote, they will need to seek independent financial advice." (WE67)
3e)
Complaints by policyholders
A large number of non-GAR policyholders and representatives of policyholders' action groups
have submitted evidence and complaints about the Compromise Scheme. According to their
claims, the Scheme had been devised in such a way as to harm policyholders from the
beginning, suggesting that the subsequent policy cuts in April and July 2002 that promptly
annihilated the modest uplift the Scheme had awarded them1, had been foreseen, if not
deliberately planned, by the EL management already when first proposing the Scheme in
September 2001. Additionally, the regulator would have been aware of the fact that the
proposed uplifts were fictitious, because they were not covered by sufficient assets.
Policyholders also complained that they had been led to believe that the with-profits fund
would have been stabilized by the Compromise Scheme, a fact which proved to be untrue, as
the fund remained subject to market fluctuations and the subsequent stock market fall during
2002. As a result, aggrieved policyholders claimed that after the Scheme was adopted in
February 2002, non-GAR policyholders were definitely worse off than before, having signed
away their right to claim redress from the Society, without having obtained any factual
counterpart.
Equitable Life and the FSA (H4) have repeatedly argued that the subsequent policy cuts had
nothing to do with the terms of the Compromise as such but were due to the drastic stock
market fall in 2002 that weakened the asset base of the with-profits fund, and claimed that a
market downturn of that magnitude could not have been foreseen at the moment the Scheme
was devised in September 20012.
The Cazalet Memorandum of January 2001 sent to the Treasury Committee agreed that "it
would be in the interest of the Society as a whole to resolve the guaranteed annuity option
problem by having policyholders with pensions in deferment relinquish their options ...
However, it is not at all clear that the GAR policyholders will vote for such a scheme, as it
appears that the likely proposal will see the value of the GAR group's policies enhanced as a
result of the up-front capital boost but that, on the basis of current market conditions, the
subsequent loss of the GAR would cause a concomitant fall in annuity income in retirement ...
If Equitable did succeed in persuading its policyholders to vote for what it calls the
"compromise", this would not strengthen its financial situation considerably, notwithstanding
the £250m kicker from Halifax, as the Society would incur substantial expenditure in buying
out the GARs. The real benefit would not be the modest improvement in Equitable's solvency
position, but the fact that the fundamentally unstable GAO problem would be eliminated"
(WE58, page 14)
Referring to the Compromise Scheme, policyholder Mr. WEIR (WE6) claimed that "when
1
see WE6, WE7, WE-CONF16, WE-CONF.
Between September 2001 and September 2002 the FTSE-100 stock market index fell by 29%, but between
December 2001 and April 2002 it remained basically unchanged.
2
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Equitable Life proposed (with the participation of the FSA) a Compromise scheme in which
policyholders would give up all their legal rights to sue in return for a very small increase in
policy values, Equitable promised greater stability and hope for the future and that the
Society would be putting £4 billion back into equity investments if the Compromise was voted
through. But the increases in policy values were not guaranteed – indeed within just a matter
of weeks the 2.5% increases had magically turned into 4% fund reductions! ... It is difficult to
believe that at the time the Compromise was devised the management of Equitable Life didn’t
already know full well that they were going to get people to sign away their rights based on a
totally false prospectus, with the full knowledge of the FSA. Without a financial
'consideration' (however small) being offered to policyholders in return for giving up their
rights to take legal action, the Compromise scheme would have been legally invalid. Yet in
effect people were voting (although they didn’t know it) for a reduction in their funds and the
removal of their right to sue the Society. The FSA allowed this to happen."
Mr. BELLORD (H2) also underlined the alleged unfairness of the Compromise Scheme
"approved by the regulators, where many policyholders lost their right to redress. Charles
Thompson (EL CEO) must have known at the time of the court hearing in February 2002 that
they had not got the money, but he failed to tell the court.1 Another point that needs exploring
is that the regulators recommended acceptance of this compromise."
Mr. WEIR (WE6) claimed that "the FSA effectively recommended the Compromise as the best
option for policyholders but was very careful not to publish this advice until 8 days after it
had been granted immunity from scrutiny by the Parliamentary Ombudsman2! By a very
strange coincidence, on the date of the first Compromise hearing in the High Court
(26 November 2001) the FSA chose that particular date of all dates to put out a sensational
press release concerning the so-called ‘Headdon side letter’ thereby completely drowning out
news coverage of the terms of the Compromise: a 'classic spoiler'. This is circumstantial
evidence that the FSA was working closely with Equitable Life and probably the Treasury to
railroad the Compromise through."
In WE7 Mr. NASSIM claimed that "the list of elective omissions denotes regulatory failure
before and after the Compromise, which was and remains knowingly deliberate ... The
Compromise Scheme of arrangement was carried through to the detriment of members and
with forfeiture of their legal rights."
Mr. DEPPE in WE81 also presented allegations of "fraudulent misrepresentation made by
Equitable in May 1999 ... Equitable had concealed the GAR liability and recommended the
sale of with-profits annuities. The single and only focus from April 2001 was to sell their
'Compromise'." He further related how at a meeting of Equitable with policyholders the
ELAS Chairman Mr. Treves "was asked by the late (EP-Petitioner) Arthur White to state that
all matters of a fraudulent nature had been dealt with in advance of the judicial 'Compromise'
application. Mr. Treves refused to give this undertaking and Mr. White asked him to note his
request and ensure the presiding judge at the application was made aware the very real
1
These allegations were denied as "wrong and mischievous" in WE-CONF5, claiming that "the Compromise
Scheme documents set out the position at that time in full detail."
2
On becoming the single UK Regulator on 1 December 2002, the FSA was formally independent from
government and thus also from PO scrutiny.
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possibility of fraudulent behaviour could exist. Mr. Treves did not carry out the express wish
... because it might have delayed or obstructed the granting of approval for the 'Compromise'.
It was therefore never brought to the attention of the presiding judge that GAR liabilities had
been concealed and WP annuities had been sold to unsuspecting policyholders."
The FSA denied allegations that the regulator would have known that the Compromise
Scheme had been allegedly lacking supporting assets. Referring to the FSA's role in brokering
the Compromise Scheme, the FSA representative Mr. STRACHAN (H4) explained that "the
Equitable Life 2002 Compromise Scheme was carried out under the Companies Act rather
than under Part VII (of the Financial Services and Markets Act 2000) and the final decision
was sanctioned under an independent Court process. Nevertheless, we encouraged Equitable
to go beyond what was required by the Companies Act to ensure that policyholders' interests
were protected as far as possible, particularly through the appointment of an independent
actuary to opine on the fairness of the proposals. We also oversaw the process of giving
appropriate compensation to policyholders who left Equitable too early to benefit from the
Compromise Scheme ... We concluded that, on the basis of the scheme that was presented for
both GAR and non-GAR policyholders, the level of the increase in policy values was a fair
offer for the GAR rights and mis-selling claims given up. Clearly, there were variations, but,
overall, this was a reasonable compromise scheme."
Allegations that policyholders were not openly informed by EL that the Compromise scheme
would not bring final stabilisation to the with-profits fund (WE-CONF16) but that any stock
market fall would require further cuts in policy values (as indeed happened in April and July
2002), were also rejected by CEO Mr. Thomson, who claimed that "the with-profits fund has
always been invested in a mix of investments and has consequently always been subject to the
impact of market movements. There was never any suggestion that the Compromise Scheme
would change the concept of with-profits. Further, the Board was not in a position to secondguess the future of investment markets." (WE70)
Mr. Anthony BOSWOOD QC stated in WE76 that, in his opinion, there were "in relation to
the conduct of the Society's affairs in 2001 and 2002 various issues and questions which need
to be addressed and answered, before excluding the possibility that policyholders, and indeed
the court, were misled because relevant material was not put before them." (WE76, par. 4) He
went on to state that "if the Board was aware, when the Scheme documentation was issued ...
and debated in court, that the 2.5% uplift was likely to be entirely illusory unless there was
some immediate and unheralded rise in equity markets (when 56% of funds were held in cash
and fixed interest securities in any event) that was surely something that ought to have been
mentioned to those, including the court, from whom approval of the Scheme was being
sought. As it was, the financial information provided as part of the scheme documentation
was seriously out of date by the time the merits of the scheme came to be debated. But the
Society's board clearly did have financial information more recent than that ... which would
have shown that the Scheme uplifts in policy values were likely to be illusory." (par. 9 and 10)
As a consequence, Mr. BOSWOOD concluded suggesting that "those responsible concealed
information which they knew to be relevant to the Scheme."
3f)
Claims of EL management not qualifying as 'fit and proper'
In the context of the alleged withholding of information when presenting the Compromise
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Scheme to policyholders, in 2005 EMAG sent a request to the FSA to open an investigation
under Section 168 of FSMA 2000, in order to verify if 3 EL top managers (the Chairman, the
Chief Executive and the Appointed Actuary) qualified as 'fit and proper persons' to perform
their functions. If, in the light of evidence presented on the Scheme, the FSA investigation
came to the conclusion that they had indeed withheld key information, they might not qualify
as 'fit and proper' to perform their function. In that case, the FSA could withdraw that
person's approval or take disciplinary proceedings under Section 63 and 66 of FSMA 2000.
Mr. Anthony BOSWOOD, QC (WE76) agreed to the point that if it was proven that EL top
managers might have "concealed information which they knew to be relevant to the Scheme ...
deliberate concealment of that nature would, in turn, suggest that the persons concerned
might not be 'fit and proper persons', the precondition for the exercise of the FSA power to
investigate" in Section 168(5) of FSMA 2000.
In a letter of 21 August 2006, the FSA stated that they "did not consider that there is cogent
and compelling evidence and reasoning which leads to the prima facie view that information
was deliberately concealed from us, the court or policyholders between December 2001 and
February 2002", concluding that they "stand by the analysis and conclusions set out in our
statement at the time of the Compromise Scheme." The evidence sighted gave no indication
the FSA has been willing - or shown any intention of - formally opening such an
investigation.
4.
Negligence in Conduct of Business (CoB) supervision
Allegations of CoB failure were addressed by a large number of policyholders not only
against the UK regulators but also against the Irish Regulator (DETE/ISFRA)1 and the
German Regulator (BAV/BaFin)2, who, according to 3LD provisions, were responsible for
CoB supervision of EL's operations on their territory.
As claimed by WE-CONF26, "it was in accordance with the Third Life Directive for the FSA
not to impose the Conduct of Business rules on branches situated in other Member States ...
(but) effective PRE protection for ELAS ... branch business had to be ensured by FSA."3
In WE-CONF10 a policyholder complained in particular about the refusal by German
regulators - systematically referring to the 'Home Country principle' as defined by 3LD - to
assume any responsibility for improper operations of EL in Germany. This claim was
supported by Mr. WESTPHAL in WS2 stating that "national supervision often plays a too
passive role in the monitoring and enforcement process" and that "unless a 'critical mass' of
1
The Central Bank and Financial Services Authority of Ireland Act 2003 stated that prudential supervision of the
insurance sector and the services provided moved in May 2003 in its totality from the Department of Enterprise,
Trade and Employment (DETE) to the Irish Financial Services Authority (ISFRA), and that actions of DETE in
the insurance sector before the commencement of the 2003 Act should be construed as actions of ISFRA and/or
the Minister for Finance (WE64).
WE80 further explains that until 2003, there were no CoB rules specific to the sale of insurance apart from the
'Provision of Information Regulations' (S.I. 15 of 2001) and S.I. 360 of 1994, both requirements enforceable
through the Courts.
2
BaFin took over responsibility for the insurance sector from BAV in May 2002.
3
see WE-CONF26, page 4 and 5, para.1.
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complaints is reached, supervision will not get active in some Member States."
4a)
Allegations of mis-selling and misrepresentation in the UK1
Fundamentally, policyholders have been making two types of allegations against EL:
- mis-selling by knowingly misrepresenting facts about the company's financial position,
especially in relation to the GAR risks;
- omission (possibly based on deceit), by failing to draw attention to the GAR risks, when that
risk was a matter to be disclosed to existing and prospective policyholders.
Specific evidence for mis-selling was produced by a number of policyholders:
Mr. SEYMOUR (WE53), presented to the committee copies of Equitable Life sales material
clearly stating that the 'with-profits' fund "has the essential feature of smoothing out
fluctuations in earnings and asset values generally associated with investments in such
portfolios."2 This claim proved to be untrue, as EL turned out not to have accumulated any
significant reserves in the years of positive market performance to allow for any 'smoothing
out'.
In a note to policyholders dated 26 January 2000 (WE53), Equitable Life claimed that the
negative Court of Appeal ruling would not affect EL's economic risk profile, asserting "there
will be no financial impact on the Equitable. The Equitable's solvency and status as an
independent mutual are therefore not in question".3 This point was later reneged in letters to
policyholders dated 14 August 2000 (immediately after the House of Lords ruling) and
18 September 2000, where the widespread cuts in with-profit policies were communicated4.
Another false statement appeared in the above-mentioned 26 January 2000 note, claiming that
"there will be no impact on bonuses for international business ... as none of the Equitable's
international policies contain such guaranteed rates." This point was proved wrong by
evidence that all policies, UK and non-UK, were managed in the same fund and there was no
separate fund for 'international policies', as claimed by EL.
Another allegation of mis-selling and misrepresentation by EL was presented by Mr. NASSIM
(WE7) who claimed that the regulators have "deliberately overlooked 'incentivised ignorance'
and fraudulent general mis-selling, as despite what the Society told policyholders about the
absence of commission fees, it paid its staff an as yet unspecified commission on sales. Nor do
we know whether the commission was the same for all the Society’s products, or if it was
greater for with-profits products. By refusing to admit or document general mis-selling and
non-disclosure, the Society and the authorities have transferred the burden of proof to each
individual policyholder ... It is hardly surprising that the FSA has belatedly said that it has
conducted its own investigation and found no case for mis-selling by the Equitable, while
refusing to publish the evidence."
Mr. JOSEPHS (WE69) claimed that "a continuous chain of evidence exists that demonstrates
that Equitable set out to create an unlawful and misleading performance record that would
1
In May 2003 the UK Financial Ombudsman Service found Equitable Life guilty of 'material
misrepresentations of fact'.
2
see WE53, annex D.
3
see WE53, annex F.
4
see WE53, annex G and H.
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survive for at least 15 years, and to use these rigged performance figures as their primary
tool to bring in new policyholders and to increase the assets of the Society. However, the
measures required to create the false performance figures also undermined the security of
EL’s finances, so that the longer the deceptions continued, the greater was the scale of
policyholders’ losses ... Equitable decided to create a favourable and continuing set of
performance statistics by the simple device of overpaying specific cohorts of policyholders,
whose premiums were received in or prior to the years 1975-1980. This was unlawful since it
breached the Directors’ fiduciary duty to deal fairly between groups of policyholders ... They
thereby deliberately put the WP Fund into effective deficit over a period of at least four years.
No hint of this was given to policyholders ... The mass of policyholders remained in blissful
ignorance of the threats overhanging their policies, and strenuous efforts were made to keep
them in that state. Their attention was focussed on their ‘policy fund’, described as a ‘share of
a central smoothed managed fund’, with their Total Policy Value representing their
‘smoothed asset share’".
In H8 Mr. BAIN also made a clear allegation of mis-selling, calling the Committee of Inquiry
"to consider the treatment of 20,000 EL customers who were sold a product called 'managed
pensions' between 1995 and 2000, and most of whom between 2001 and 2005 received little
or no redress, despite being victims of what the evidence suggests was an orchestrated culture
of mis-selling ... EL behaved as a company, without integrity, care or diligence, though with a
great deal of self-interested skill." (WE72)
In WE81 Mr. DEPPE related meeting Equitable CEO Mr. Thomson in January 2003, asking
him in a televised programme "how it had been possible for Equitable to instigate the
marketing of with-profits related products in the post-September 1998 period without resort
to wilful deception. He did not answer ... His eventual written response was to advise me that
my complaint had been resolved by the 'Compromise' and the case was closed."
WE-CONF2 also added a number of mis-selling allegations, in particular for omitting to
represent the GAR risk to prospective customers, a fact that damaged mostly Late-Joiner
policyholders who took out EL policies after September 1998, i.e. after EL had already sought
legal advice on the GAR problem with its solicitors and regulators. "Each of the members
(Late Joiners) or at any rate most of them, received from the Society a 'Key Features'
document relevant to the policy he or she was buying. It was a requirement of the PIA rules ...
It is evident that these gentlemen (EL executive directors) knew the advice the Society was
receiving from its lawyers about the (Hyman) litigation and the issues surrounding it; and
they were all involved in the process of providing information to the Society's sales force for
dissemination to policyholders and prospective policyholders ... By January 1999 the GAR
problem was the subject of intense discussions in the press, which was putting out alarming
articles and reports ... Clearly this made the writing of new business problematic. Yet new
business was required f the Society was to avoid closure ... New with-profits policyholders
needed reassurance at all events they could not be told of the GAR risks ... The Society
adopted a policy of downplaying the GAR risks, misrepresenting the facts to prospective
policyholders: the 'Risk Factors' section of the Key Features document provided being silent
about the GAR risks."
Members of the Late-Joiners action group reported that EL salesmen gave them different
stories to soothe their concerns: "that press reports that the GAR liabilities might be in the
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order of £1.5bn were wrong; that the maximum cost to the Society was unlikely to exceed
£50m; that the GAR liabilities would be ring-fenced among the GAR policyholders; that
reinsurance was in place to protect non-GAR policyholders." (WE-CONF2)1
Policyholder Mr. John GALVIN (WE-FILE15) complained that his decision to buy an
Equitable Life policy was partly based on EL's reassurance of its solid financial standing
confirmed by the "AA" rating obtained by the international rating agency Standard & Poor's2
(annex to EL letter in WE-FILE15).
Referring to misleading information from EL to policyholders, Ms. KWANTES (H7) recalled
that "when Equitable went to court on the GAR issue we all received letters to inform us that
everything was fine, negative comments that had appeared in the press were nothing to worry
about and there was a very impressive advertising campaign which gave us all a sense of
security."
In H5 Mr. LLOYD, a former sales representative of Equitable Life in western England
between 1995 and 2001, clearly dismissed all allegations of mis-selling by the Equitable sales
force: "Telephoning for appointments, often to offer an annual review or a current update on
policies, was nearly always welcomed by our clients. The news was often good and it was not
difficult to propose new investments. The clients often commented on how their other
providers did not offer the same level of service ... When the guaranteed annuity rate issue
became known and talked about, which was I believe in around 1997 – that was the first time
I had even heard about it – we very quickly received a briefing from the board. The briefing
was to give clients a non-guaranteed final bonus and a GAR that only applied to the
guaranteed element. That would be equivalent to giving that client 20% more than their fair
share of the fund. This as a concept was not difficult to understand and not difficult to explain
to clients from that point on. My own experience was that the response from clients who
heard this explanation, including those who had GARs in their policies, was favourable."
Client relations would thus have been good even in 2000 as "by approaching the whole issue
during that period right up until the House of Lords ruling in July 2000, we had very little
difficulty and very little problem with our clients accepting the explanation we were giving."
Allegations of knowingly misleading clients or possibly 'glossing over' unpleasant facts were
equally and vehemently denied by Mr. LLOYD: "I do not believe there was ever a point when
I questioned whether I was pushing or selling something that I should not be selling, and I do
not believe that any of my colleagues felt that way either ... I can tell you that, in terms of the
information we were given, we were never ever told: ‘you can say this, but you must not say
that’, or ‘here is the true position, but you must not let people know this’. That was never ever
the case ... I did buy the line that the Society knew what it was doing, knew how to run the
business and did have a successful working model. So there was nothing to gloss over. I never
felt at any point from that stage right up until 8 December 2000, the day it closed, that I was
glossing over or keeping from my clients information that I had somehow discovered and was
not divulging ... Certainly I never knowingly misled any of my clients and I do not believe any
1
see WE-CONF2, para.38-40.
In fact, the S&P rating of EL was 'AA' (investment grade) from 1993-1999, downgraded to A+ (watch neg.)
only in May 1999, then below investment grade (BB/watch neg.) only in December 2000. It was then further
downgraded to B in June 2001 and CCC (high default risk) in September 2001. No credit rating has been
awarded by S&P since 21 February 2002 (WE-FILE22).
2
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of the Society’s representatives would have continued selling contracts that they knew were
misleading. I do not believe that to be the case. I think that, in hindsight, we were selling the
with-profits fund in a way that, from what we now know, was reckless both for income
drawdown and for with-profit annuities. It was a damaged proposition, but we did not know
that. It was damaged because of the true nature of the liabilities in that fund, but we did not
know that."
Mr. LLOYD admitted, however, that the risk profile of the products they were selling did not
accurately reflect the reality, although the sales force had been apparently unaware of this: "I
think the biggest mistake by far was the question of how we were allowed to sell the withprofits fund as low-to-medium risk when it almost certainly should have had a warning
plastered all over it from about 1998 onwards ... I did not think it at the time, but in retrospect
and hearing all the points being made I think we should have had a warning. The board
should have been warning our clients that our with-profits fund should not be treated as lowto-medium risk, because there were issues that were unresolved and while they were
unresolved, if anything, we should have withdrawn it ... With hindsight, I believe I was misled
about the risks associated with the with-profits fund. I believe that now, I most certainly did
not at the time ... I believe that something should have been done to prevent further clients –
other than those already in it – committing money to a fund that had liabilities that were
beyond its means."
Finally, on the selling material, Mr. LLOYD also denied allegations it was made to mislead
clients, as "the material was not, as I saw it at the time, designed to mislead anyone. It was
giving people a view of what we thought was a sound, well-run company and fund and
encouraging people to invest because of the performance we had achieved over the years."
4b)
Allegations of mis-selling and misrepresentation in other Member States
Reporting further mis-selling allegations outside of the UK, Mr. SEYMOUR (H7), a
policyholder who took out his policy in Belgium, related that "ELAS sales personnel
approached potential customers throughout the Community stating that it was possible to
invest in ELAS pension policies due to changes in the law. It stated that these policies were
called “international” policies and were separately administered by a branch office outside
the UK ..."
Another document1 proved that ELAS had been claiming to provide something of a
"smoothing fund" based on the build up of reserves: "ELAS claimed it was running its pension
fund as a smoothing fund by holding reserves. The bonuses were declared annually and were
specified as being 'guaranteed'. All documents stressed regulation in the UK in the back page
... I was also assured that it was exclusively regulated in the UK so I felt sure that what I had
seen and been told was correct. At the point of sale the company had assured potential
purchasers that the 'international' policies were separate from the UK with-profit fund." (H7)
Mr. SEYMOUR added that during an ELAS sales visit to Belgium in 1994, ELAS
representatives informed him that "they were authorized to make such sales outside the UK.
1
Sales documents were submitted, see WE53.
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They also stressed that the content of their sales material was accurate, that the conduct of
their business (was) sound, because their investment activity was regulated by the 'reliable
UK regulator' (words of the ELAS representatives)." (WE36)
A number of other non-UK policyholders reported allegations of mis-selling or misrepresentation of facts. Policyholder Mr. McCARTHY (WE-FILE16) reported that his
decision to join Equitable Life was influenced by the Equitable's claim that it was a member
of the "Insurance Ombudsman of Ireland Scheme". Mr. BERRY (WE-FILE13), an Irish
policyholder, asked how it was possible that "the Equitable, in its circumstances, could be
allowed to write new business (in Ireland) as late as April 2000. It could only do so because
of gross dereliction of duty on the part of the Regulating Authority." Policyholder Mr.
DUGGAN (WE-FILE14) claimed the Equitable policy had been sold to him as being "subject
to the laws of Ireland". Policyholder Mr. TROY (WE-FILE4) considered he was mis-sold his
policy in December 1999 as "the company had major difficulties with its liabilities to pension
funds in the UK ... and I was not made aware or privy to this." Policyholder Mr. O'FARRELL
(WE-FILE9) complained that he "was never informed of the potential GAR liability looming
over the fund and the possible consequences to my pensions funds having to partly finance
that liability."
An interesting statement in this context was made by Mr. Seamus POWER, a former EL sales
representative in Ireland (WE-FILE2), who said that he had heard "about the GAR issue
through the Sunday Times in late 1998. By then there were about 12 sales people and none of
us had ever heard about the guaranteed annuities, as they were never sold in Ireland. We
asked the management about the situation and were told it was nothing to do with us and to
get on with the sales." Hearing about the Court case coming up in July 1999, he was told "as
not having anything to do with the International Branch as these policies were never sold
here and our funds were 'ring-fenced'." After the lost appeal case "we were told to keep
selling as we re 'ring-fenced' and would not be affected by the outcome even in the worst case
... We continued to sell and more sales staff were recruited during this time ... When EL was
closed to new business, we were all made redundant. Then the penalties were introduced and
locked many policyholders into the position of either taking a 10% reduction in policy value
or staying invested. It appears that the management of EL knew there were significant
problems within the Society in 1998 and I think all policies sold after this date should be
void."1
Countering allegations put forward by Irish policyholders who claimed to have been falsely
informed by Equitable Life (i.e. that they had bought - or would be buying - into a separate
'ring-fenced' Irish fund unaffected by liabilities arising within the UK fund) EL CEO
Mr. THOMSON (H8) replied that "Irish policies had a separate bonus series and notionally
earmarked assets, allowing investment returns in Irish business to reflect investment returns
in Ireland. So, for example, the 16% policy value reductions which applied in the UK in 2001
did not apply to Irish policies." He confirmed however that the Irish business was nonetheless
part of the Society’s single with-profits fund.
But WE-CONF28 highlighted that, although it was correct that the Irish policies had not
1
In H4, Ms O'DEA stated that Equitable Life operated its Irish branch from 1991 to 2001 and closed to new
business in December 2000 at the same time as the UK Head office.
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suffered the 16% policy value reduction in July 2001, "to compensate for this, higher
penalties and lower bonuses were awarded to Irish policyholders."1
WE-CONF21 stated that "there existed nothing in EL's product literature which stated that
Irish investments would somehow be kept separate from the rest of the with-profits funds."
This statement was supported by ISFRA in WE80 claiming that "no evidence has been
presented to support the allegations that EL were representing that an Irish 'ring-fenced' fund
existed".
This statement was however not supported by evidence in WE-CONF28, which proved that at
an EL press conference in Dublin on 14 March 2000 "Terry Curtis, International Actuary of
Equitable Life UK ... stated that the Court of Appeal ruling had no impact on Irish
policyholders who are ring-fenced from their UK counterpoints."2
WE-CONF28 further proved that on 12 December 2000 "Mr. Noel Creedon, managing
director of the (EL) Irish operation insisted there would be no penalty in the Irish market for
early encashment of with-profits policies ... We have a surplus on the fund at the moment ..."
Both statements clearly indicate that EL was publicly referring to a separate Irish fund, and
making Irish policyholders falsely believe that they were - or had been - buying into an EL
fund which was separate from the main UK fund.
Referring to EL's alleged 'International Policies' Mr. SEYMOUR (H7) also reported that when
problems at Equitable Life were being widely reported in the press in late 1999, Equitable
wrote to all 'international' policyholders in January 2000 "reassuring them that their policies
were indeed separate and would be unaffected by any court ruling on the company’s UK
funds. It was only subsequent to the Court case that the company admitted that this was not
true. On 14 August 2000 ELAS wrote to say that as a result of the loss of the Court case with
profit bonuses would be reduced for 'all' types of policyholders and that the society was up for
sale." 3
4c)
Allegations of 'churning' policyholders' contracts
In WE72 Mr. BAIN claimed that in the mid-1990s Equitable Life had devised a strategy to
counter the sharp fall in interest rates which had increased dramatically its liabilities due to
the GAR-policies on its books and threatened its minimum reserves margins. Thus, EL would
have proposed to policyholders "a new-style pension plan which would enable deferring an
annuity until age 75, but claiming the 25% tax-free cash immediately, and drawing down
income in the meantime. The attractions of ‘managed pensions’ were powerful:
(1) they could be sold on the story that annuity rates might go up again
(2) they would create ‘new business’ from selling a new pension product
(3) they would generate cash from the tax-free lump sum, and the income, which could be
1
see further details in the annexes to WE-CONF28.
WE-CONF28 also underlines the fact that this press conference, "just 4 months before the bubble burst in the
form of the House of Lords ruling, had been used by EL to launch its 'European Fund' in Ireland... This was
irresponsible and sinister. The timing of the launch indicates clearly that the Society was intent on extracting the
maximum amount of money from the Irish market ..."
3
Copy of the letter submitted to the committee.
2
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invested in other EL products
(4) policyholders with guaranteed annuity rates would lose their guarantees, offering
potential significant reduction of liabilities."
As in 1995 the UK general election - with Labour favourite to win - was only 2 years away,
"EL’s salesforce was approaching its affluent clients who were over 50, or as soon as they
turned 50, suggesting 'income drawdown1'", in spite of detailed guidance by the PIA (G-60)
which considered it suitable only for a minority of people approaching retirement. "The first
technique was a scare story: they worried clients that an incoming Labour government might
easily scrap the entitlement to tax-free cash from pensions – 'better take it now, even if you
don’t really need a lump sum, and draw down income, even if you don’t really need any
income'.
As an insurance salesman’s obligation was to show that he had offered the client the most
suitable product in the insurer’s product range, "the second technique was to withhold, or
falsify, relevant information about the product – its tax status, for instance - or possible
alternative products which in practice were never sold at all. Then, once the drawdown sale
had been clinched, it was suggested that the tax-free lump sum, and usually the income too,
should now be invested in other EL products. That miraculously created a triple sale, triple
commission, and triple ‘new business’ sales, often of substantial sums well into six figures from what was actually old business."2
A report cited by WE723 listed 200 cases of dissatisfied EL policyholders where "every single
one had featured lack of information and misrepresentation at point of sale and for virtually
all of these clients, doing nothing or taking a phased retirement plan had been best advice ...
Income drawdown was a complex option requiring proper advice, but when sold directly
there was substantial scope for commission abuse. What was the regulator doing? In
February 1999 publicly available figures ought to have set alarm bells ringing in the PIA:
EL’s sales force had already sold 11,600 income drawdown plans worth £1.35bn – almost
twice the £750m sold by the next biggest player ... and four times the industry average.
Moreover, EL had invested 95% of its drawdown money in its with-profits fund – whereas
chief rivals Scottish Equitable (25% in with-profits) and Winterthur (very little) both said
publicly that with-profits was not suitable for most investors. Why was EL so out of line with
the rest of the industry? At last in May 2002 the FSA announced its concerns: it had
discovered that drawdown could earn salesmen commissions of 6% compared with 1.5% in
annuities, and said it was reviewing evidence of bias in sales."
Mr. BAIN concluded: "Thousands of pensions carrying valuable guaranteed annuity rates
were wiped off the books, with customers typically not even informed that they had a
guaranteed rate, let alone being offered an informed choice. How did EL get away with these
flagrant breaches of conduct of business rules, not to mention the overriding principles of
integrity and diligence? I believe the UK regulators firstly through incompetence failed to
1
'income drawdown' is defined as a "facility which allows a delay in buying an annuity if rates should be low
when retirement age is reached. Drawdown allows putting off buying an annuity to a maximum age of 75, giving
an income directly from the pension fund in the meantime" (finance-glossary.com).
2
3
The appendix to WE72 lists a number of case studies supporting this claim.
Report by Alan Steel Asset Management, a Scottish IFA firm.
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notice clear warning signals about this company’s conduct of business or give the consumer
any protection from it. Secondly they failed to understand how these business practices
enabled EL to misrepresent the value of its new business, among other things, in its critical
financial reporting. Finally, they colluded with Equitable Life’s new board in a strategy to
minimise financial and reputation damage to the company, the industry and the government.
But this could only be done at the expense of policyholders’ proven legal rights." (WE72)
A similar allegation was made by Mr. JOSEPHS (WE69) claiming that "Equitable decided to
misrepresent the asset backing for its newer ‘investment’ policies such as Personal Pensions
and Insurance Bonds. It did this from 1987 via its sales force... Over time, Equitable pursued
the goal of replacing older forms of policy with more ‘technically efficient’ versions,
requiring even smaller capital reserves (because of more limited guarantees). To sustain
apparent fairness, such policies received the same total return, but with a substantially
increased proportion of final bonus to cover the reduced guaranteed element. The apparent
fairness was a mirage because the whole of final bonus was contractually removable at any
time, so that the price of increased ‘efficiency’ for the Society was substantially increased risk
for the policyholder. These risks were deliberately concealed from the customers affected by
such deliberate policy restructuring."
4d)
Claims of communication failure between UK regulators
Mr. NASSIM (WE7) claimed that "the prudential regulators failed to communicate effectively
with those responsible for the regulation of the conduct of business by insurance companies,
particularly in relation to ELAS’ published actuarial and insurance business paradigm, or to
advise the Conduct of Business Regulators that the realistic position rather than the solvency
position was the primary reference for potential customers".
ES-2 considered that in the UK "the prudential regulators did non see it as part of their remit
to keep the CoB-regulators informed of problems in the life industry... There was little or no
practical cooperation between them until the staff responsible for prudential supervision
found themselves in the same building as the staff responsible for CoB ... Even then, it would
take some time for each side to ... learn how to work together."
On this issue, the FSA representative Mr. STRACHAN (H4) explained that "there are broadly
three sets of circumstances in which communications between regulators should formally take
place. Those are when a company that has branched into other Member States becomes
insolvent; when a company that has branched is de-authorised for any reason and when there
are changes in circumstances, such as the closure of the branch. The first two conditions –
insolvency and de-authorisation – were never triggered, so they are not relevant. When the
branches in Ireland and Germany were physically closed following Equitable’s closure to new
business, then there was contact with our counterparts at the time."
Mr. BAYLISS (H5) also stated that "there is no doubt that the FSA has done a lot of work on
the part of its mandate in relation to prudential management of companies, and particularly
in relation to with-profit ... The FSA has been much more active on the conduct of business,
because that was perceived to be the industry’s weakness ... I think that in terms of its conduct
of business requirement, the regulator was going through a learning curve and one that it
could justifiably say was new, because to be honest the Treasury and the DTI had not had that
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type of role.
4e)
Communications between UK and foreign regulators
UK/Germany
Evidence seen in WE-CONF9 and WE-CONF17 suggested that the first contacts between UK
and German regulators on prudential supervision issues concerning Equitable Life date as far
back as 19951, after EL opened its German branch in Cologne in December 1992 and began
selling policies by authorized agents. On 20 March 1995, the Bundesaufsichtsamt für das
Versicherungswesen2 (BAV) with reference to Article 5.32 of the Siena Protocol, wrote to the
DTI recommending the use of new mortality tables drawn up by the German Actuaries
Association for the calculation of premiums and cover reserves. Stating that it "could not
assess to what extent the provisions on the interest rate of reserves applicable in the UK have
been observed, it ... is possible the undertaking has not complied with the provisions of art.19
in conjunction with art.18 (1c) of TLD".
The BAV also uttered concern that the Equitable Life Deutschland marketing manager was
quoted3 as making no distinction between men and women in the application of annuities
"which would have been contrary to actuarial principles applying in Germany". A reply from
DTI, if issued, has not been presented to this committee.
A second exchange, this time between BAV and FSA, happened in the aftermath of the House
of Lords ruling on 31 July 2000 - following media reports and enquiries from worried German
policyholders - the BAV asked to be informed on the financial stability of EL, any actions
taken by the FSA in relation to the company and the ruling's consequences for German
policyholders.
The FSA reply came promptly on 7 August 2000 "subject to the disclosure restrictions in
accordance with the provisions in the EC Insurance Directive". Thus BAV was informed that
the FSA was "satisfied that EL remains able to cover the required margin of solvency,
however the level of cover is below what both the FSA and the company would want to see on
a long-term basis." The letter further added in very optimistic terms that "the company is
putting itself up for sale and ... there are not expected to be any shortage of companies
interested in acquiring Equitable Life, because of its strong reputation in the UK industry for
efficiency ... We are monitoring the solvency position closely, but are content that the plans
for the sale of the company can be expected to resolve the longer term concerns about the
financial position. The management of the company appear to be handling the situation
effectively and we are satisfied that in doing so they are seeking to act in the best interests of
policyholders."4
Finally, the FSA confirmed that "policyholders of the (German) branch will be in the same
1
The German implementation law for the Third Life Directive came into force on 21 July 1994.
The current German single financial regulator, BaFin, was created in May 2002.
3
In the newspaper 'Die Welt' of 27 February 1995: see annex 2 of WE-CONF9.
4
This just four months before EL's closure for new business and resignation of the EL board!
2
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position as UK policyholders", adding that "on completion of the sale of EL, the company
expects to be in a position to restore the cut in the value of with-profits policies that will result
from its revised bonus policy." It concluded hoping the information will enable BAV "to allay
some of the broader concerns of German policyholders."
Then, as the sale of Equitable Life failed to materialize and it was forced to close to new
business, BAV contacted the FSA again on 13 December 2000, asking for explanations in the
light of their August letter. The FSA reply came again promptly on 3 January 2001 and referring to previous phone contacts - reiterated the point that "EL remains solvent, existing
policies remain valid and it is able to meet its contractual obligations to policyholders", going
as far as defining "many of the press reports in relation to EL have been inaccurate and
speculative" and closed by saying that the FSA "will not be requiring the company to provide
a new valuation."
Following contacts between the UK and German regulators were limited to announcing the
prospective closure of EL's German branch (30 June 2001) which prompted a reply from
BAV reminding that "some policyholders only took out a policy with EL because it had a
branch in Germany", and expressing their wish "that German policyholders continue to
receive an optimal service in the future." BAV closed by requesting "a statement on how the
German policyholders are to be served in the future." No reply from FSA appears on record,
and contacts between regulators seem to have loosened afterwards, as BAV had to write again
twice (on 7 November 2001 and 19 March 2002) asking FSA for a clear confirmation on the
closure date of the EL German branch, which was shut down on 30 September 2001.1
Finally, referring to the sharing of supervisory responsibilities between the UK and German
regulators during the period prior to the entry into force of 3LD, WE-CONF26 asserted that
"under the regime of the Second Life Directive ELAS early German branch business has to be
considered not a scenario of 'passive freedom of services'. It was the ELAS German Branch
that actively approached German policyholders. This qualifies ELAS early German branch
business for active freedom of services rather than art.13 of the Second Life Directive." As
such it "was to be supervised by the supervisory arrangements of Germany and the BAV and
not by those of the UK and the FSA."
UK/Ireland
As recalled by the Irish Financial Regulator in WE61 "EL operated a branch in Ireland from
1991 to 2001 and sold policies to Irish citizens. Under 3LD, the Irish branch was subject to
prudential regulation by the UK regulator ... and closed to new business in December 2000,
at the same time as the UK head office, and has not sold any new policies since then. EL is
servicing its remaining Irish policyholders on a cross-border basis under the provisions of the
3LD ... There was no documentary evidence put to us that EL had breached any Irish
financial services legislation."
Correspondence between the UK and Irish regulators on record (WE-CONF9) is limited to
technical exchanges in 1994 and 1999 relating to changes in the 'EC requisite details' of EL's
1
Existing German policies are today being served through 'ELAS CSC Germany', Aylesbury, UK.
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Irish branch, which had been operating since 1991 (WE38). Further exchanges happened in
2002, when the FSA informed the DETE1 of the closure of EL's Irish branch and on its
operating under passporting agreements from the UK as of 8 July 2002, joining a solvency
certificate.
4f)
Misleading advertising on the German and Irish market
In early 2000, Equitable Life started an aggressive marketing campaign in Germany to attract
more German clients. The BAV identified in EL adverts a misconduct on the ground that such
advertisements were misleading in their use of terms such as guarantees, guaranteed terminal
bonus, with-profit benefits and final bonus. Relating to this issue, Mr. WEYER representing
policyholders' association DAGEV (H3, WE22) supported claims that Equitable Life's adverts
were a case for misrepresentation.
Two advertisements in particular, published in large German newspapers2 in February 2000,
appeared grossly misleading: one advert ('13%', see picture below) suggested EL granted
guaranteed rates twice the German average at that time; the second advert ('Buy German,
Earn British') implicitly suggested EL policies were under surveillance of German regulatory
authorities, which was clearly not the case for prudential supervision.
Questioned on this subject, the German financial regulator (BaFin) representative
Dr. STEFFEN reported in H6 that Equitable Life Deutschland (ELD) had stopped the
advertisement campaign after prompt intervention by the regulator (at that time still BAV).
1
Department of Enterprise, Trade and Employment (insurance regulator 1989-2001); the Irish Financial
Regulator (ISFRA) was established only on 1 May 2003.
2
"Buy German, earn British. High returns consistent with a high degree of security - the ideal savings strategy
for German investors first had to be devised" and "13% returns: ask your insurer why they only give you half"
full-page advertisements in "Die Welt am Sonntag", weekly newspaper, and "Frankfurter Allgemeine Zeitung",
daily, in February 2000.
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However, WE-CONF17 shed additional light on this point, showing that the regulator's
intervention was quite 'tame' both in timing and effectiveness. A first BAV letter of
12 April 2000 - some six weeks after the adverts had appeared in the press - asked ELD to
comment on allegations of improper advertising, repeating its request on 29 May and 4 July
2000. ELD's reply finally came on 17 July 2000, apparently dissatisfying, as BAV had to put
additional questions: while the effects of the House of Lords ruling on EL were widely
debated in the UK press, BAV wrote again on 31 July 2000, contesting the adverts' legitimacy
and asking to specify "whether the advert is still in use in this form; if not please send us a
sample of the updated version." Even this request had to be reiterated on 12 September before
finally getting a reply from ELD on 21 September 2000, in which ELD confirmed the advert
had been withdrawn ... over six months after their first appearance in the German press!
On 10 October 2000, BAV acknowledged the withdrawal of the first advert, and intervened to
stop the second advert, but again in very subdued wording and without issuing any direct
order or setting a specific deadline ("I therefore ask you to withdraw this particular advert or
any publicity of similar content").
No specific cases of misleading advertising by ELAS were reported in Ireland: the Irish
Financial regulator stated in WE 80 that they were "not aware of any complaints having been
received by the relevant Irish authorities charged with regulation of the insurance industry
regarding misleading advertising by Equitable Life."
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Conclusions PART III - REGULATORY SYSTEM
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PART III - REGULATORY SYSTEM
Light Touch regulatory policy by UK Regulators
1.
There have been compelling accounts which indicate that the UK consistently applied,
over a substantial period in the past two decades, both before and after the entry in force
of the Third Life Directive, a light touch regulatory policy on the life insurance business.
Submissions and statements show that a principles-based regulatory policy has now been
extensively developed and implemented in the UK and is expected to be integrated into
the Solvency II proposals.
2.
The committee understands that no regulatory regime can seek to eliminate risk and
completely prevent all failures of regulated firms, as any such system would be likely to
inhibit commercial enterprise, competition and innovation to the detriment of consumer
choice. However, there have been numerous statements which suggest that the UK's light
touch regulatory policy went a step too far and thereby contributed to a weak regulatory
environment, which allowed the difficulties at ELAS to grow unchecked, when in a
stronger regulatory system they might have become apparent at an earlier stage and the
final crisis might have been prevented.
3.
It appears that UK regulators failed to react in a timely manner to the fact that ELAS had
been chronically short of assets throughout the 1990s, as it did not properly reserve for
future terminal bonuses which policyholders had been led to expect (even if they were
not guaranteed). This occurred as a result of the rules for creating provisions covering
future discretionary bonuses being kept deliberately vague by regulators, who appeared in
turn merely to leave them to be dealt with unchecked by the Appointed Actuaries.
Regulatory shortcomings by UK Regulators
4.
There have been many statements and submissions which support a finding of regulatory
failure and prudential supervision shortcomings by the different UK life insurance
regulators (DTI/HMT/FSA), as well as by the GAD, in relation to the supervision of
ELAS throughout the 1990s and specifically after the Third Life Directive entered in
force in 1994.
5.
Likewise, there is ample material to indicate that if the UK regulators had correctly and
diligently exercised their prudential supervisory and regulatory powers, as required by
Articles 10 and 13 of the Third Life Directive, they ought in turn to have discovered and
reacted to the weaknesses and risks inherent in ELAS's business model and operations at
a time before a state of crisis became apparent.
6.
There have been a significant number of statements to the effect that the UK regulators
failed to prevent ELAS from steering into its crisis and therefore failed to protect ELAS
policyholders in the UK and other Member States from suffering financial losses as a
direct consequence.
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7.
Statements and expert advice received by the committee appear to contradict Lord
Penrose's overall assessment that "principally, the Society was author of its own
misfortunes. Regulatory system failures were secondary factors1". Particularly, his own
report's 'Key Findings'2 seem to be at odds with his above assessment, in that the Findings
state that regulatory failures had indeed substantially contributed to creating a weak
regulatory environment in which the ELAS crisis could unfold.
Failure to recognize the GAR risks
8.
There is a large body of material which suggests that the UK regulators failed to
recognize - or even negligently underestimated - the potential impact of GAR policies on
the financial stability of ELAS, particularly in the event of a substantial downturn in
financial markets and given ELAS' reputation of applying thin solvency and reserve
margins. It seems that when this risk was finally recognized by UK Regulators, it was to
too late to reverse the situation and any subsequent regulatory action could only be a
belated attempt at damage limitation.
9.
There can be little doubt that the equity bear market in 2001-2002 contributed to an
acceleration of the ELAS crisis after the House of Lords' ruling. However, adverse
market forces alone cannot be held out as the sole reason for the ELAS crisis, as is
witnessed by the fact that not all UK life offices suffered a financial crisis of this
magnitude. In the ELAS case, the available material suggests that a number of factors
which clearly pre-dated the bear market, and in particular the GAR issue, had already
created the basis for the Society's future financial problems.
Excessive deference to ELAS
10. It is also apparent that the UK regulators behaved with undue awe or deference towards
ELAS, particularly given its long history and hitherto highly reputable status, leading
them to consider it as the top pick of the life insurance industry and apparently believed
to be too good and too reputable to make mistakes.
11. A number of witnesses and statements have asserted that it was precisely this attitude of
deference which contributed significantly to the creation of a permissive prudential
approach to supervision and a weak regulatory environment which in turn permitted
ELAS to operate unchallenged, thus allowing the Society's financial weakness to build up
unchecked over the years.
Shifting of responsibilities between UK regulators
12. The committee believes that the shifting of regulatory responsibilities between different
UK regulatory bodies until the creation of the FSA was clearly detrimental to the
efficiency of supervisory and regulatory action throughout the 1990s.
1
2
see WE 16, chapter 20, para.84.
see WE16, page 726: para.240, points 7-11.
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13. There are many statements which support the contention that communication weaknesses
between the UK regulators contributed to a situation which allowed the growing
problems at ELAS to go unchecked and develop into a crisis. However, in this particular
respect, a number of statements have suggested that the situation in the UK has improved
since the creation of the single Financial Services Authority.
Allegations of regulators' collusion with ELAS and/or deliberate fraud
14. The committee is not persuaded by allegations1 of a deliberate and coordinated strategy
of collusion between the UK regulators and the ELAS management, either of any
obstruction of the investigation into the reasons for the ELAS crisis or of a deliberate and
coordinated fraud at the expense of ELAS policyholders.
15. The committee is of the opinion that after the ELAS crisis had unfolded, as many parties
have claimed , on a number of occasions, the UK regulators were slow, somewhat
reticent and not always fully transparent in leading the ELAS investigation, as well as in
reporting on it to the public, in particular to the policyholders concerned.
Compromise Scheme (CS)
16. There are numerous and compelling statements2 suggesting that a large number of
policyholders felt misled or deceived by ELAS and the Regulators when subscribing to
and voting in favour of the Compromise Scheme.
17. The committee believes that, when voting on the CS, policyholders were not fully aware
of the legal consequences of their decision.3 This appears to be partly due to the
complexity of the legal information supplied with the CS proposal, both by ELAS and the
FSA, which may well have been beyond the understanding of the average policyholder.
18. The committee also believes that a clear warning should have informed policyholders
that, by agreeing to the CS, the with-profits-fund's stability was by no means guaranteed
in the long term and remained fully exposed to the fluctuations of financial markets and
that the uplifts in policy values granted under the CS could possibly be wiped out by
further cuts in policy values.
Mis-selling allegations
19. There have been many statements both direct and indirect, some of which clearly support
the contention that ELAS was responsible for mis-selling and misrepresentation to
policyholders and potential clients, in the UK, Ireland, Germany and in other Member
States where it had operations.
20. In particular, there are statements4 which suggest that ELAS misinformed policyholders
and prospective customers on a number of issues, knowingly omitting to draw their
1
see Part III, Section IV.1 (b) and (f).
see Part III, Section IV.3 (e).
2 see Part III, Section IV.3 (b) to (d).
3 see Part III, Section IV.2 (a) and Section IV.4 (a).
1
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attention to the GAR risk, even after ELAS had sought legal advice on the GAR problem
with its solicitors and regulators.
21. The committee welcomes the Distance-Selling Directive of 2002 (Directive 2002/65/EC,
amending Directive 97/7/EC), which successfully seeks to clarify legal provisions for the
facilitation of the selling of insurance policies outside the Member State in which the
company is headquartered.
22. The committee has heard further mis-selling allegations, suggesting that ELAS sales
material claimed that the with-profits fund was smoothing out fluctuations in earnings
and asset values. Furthermore, it was alleged that ELAS pursued an aggressive policy of
churning existing ELAS policies towards newer investment policies which were highly
profitable for ELAS, thus generating new business and commissions and requiring even
smaller capital reserves, clearly contrary to policyholders' interests.
23. There are also statements to support a range of other mis-selling allegations in the other
Member States where ELAS had sales operations, for example tempting prospective
customers by holding out the potential investments to have specific qualities which did
not actually exist, for example, the claims that Irish or international policies were ringfenced, and that German policies were subject to the German Financial Regulator's
control.
Negligence in regulators' Conduct of Business (CoB) supervision
24. The committee believes that the UK CoB regulators reacted late, if at all, in relation to
the above mentioned ELAS sales and marketing practices. CoB regulators in the other
Member States concerned also reacted late, partly because appropriate supervisory
structures were not yet in place and partly because they expected to rely on the efficiency
of UK regulatory supervision. However, it seems that once the problems surrounding
ELAS had become commonly known or brought to their attention, Irish and German
regulators' CoB supervision belatedly improved.
25. In general terms, the statements heard and submitted strongly suggest that regulatory
supervision of life insurance in the Member States affected has improved in the past five
years, in particular where a single insurance supervisory authority now covers both
prudential and CoB supervision.
Communication failures between UK and foreign regulators
26. Many accounts supported the claim that communications between the UK, Irish, German
and other regulators in relation to ELAS were unsatisfactory, if not clearly deficient,
throughout the 1990s and up to 2002. In particular, the committee considers that the
communications, if any, which took place were totally insufficient to deal with such an
important issue as the ELAS crisis with obvious cross-border implications.
27. The committee firmly believes that the regulators' interpretation of the home/host country
responsibilities in supervising life assurance companies was far too passive, with one
tending to rely on the other. As confirmed by a number of statements, this behaviour
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itself contributed to a further weakening of the regulatory environment and led in
particular to non-UK policyholders falling between two stools and the host regulator in
Ireland and Germany appearing to be mere bystanders with little control over the
insurance business being done in their territory, let alone in other Member States. The
committee therefore supports work to examine the possibility of future regulatory
supervision of companies at group level, in order to clarify regulatory responsibilities.
28. Statements and material provided to the committee give it reasons to believe that the
communication between insurance regulators has improved since 2004 due to the closer
cooperation of regulators within the newly created CEIOPS network of European
regulators, which aims at a higher performance in cross-border supervision and
regulatory action but too late to assist ELAS policy holders in the lead-in to the crisis.
29. However, the committee considers that where the host State notifies no "general good"
rules to the home State authority, there is an inherent risk that neither the home nor the
host supervisor looks at conduct of business rules because each would think that the other
was enforcing its own rules.
30. Overall, the committee concluded that the development of the internal market in financial
services was pursued ahead of concerns about ensuring that sufficient consumer
safeguards were in place.
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PART IV - REMEDIES
on the status of claims and adequacy of remedies available to policy holders
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INDEX PART IV
I.
Introduction
II.
Damages
1. Policyholders affected
2. Collective losses
3. Individual losses
III.
Complaints to the UK regulators and official investigations
1. Complaints to the FSA
2. The Baird Report
2. The Penrose Report
IV.
Actions by ELAS in relation to aggrieved policyholders
1. Litigation against former directors and auditors
2. The Compromise Scheme
3. Complaints to ELAS and 'Policy Reviews'
V.
Allegations of fraud and the UK Serious Fraud Office
VI.
Claims against ELAS for mis-selling
1. Non-judicial - the UK Financial Ombudsman Service (FOS)
a) Introduction
b) Treatment of Equitable Life complaints
c) Policyholders' criticism of the FOS's handling of complaints
2. Judicial - court proceedings
a) UK legal bases for claims against ELAS
b) Limitation period
c) Court cases
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VII.
Claims against the UK regulator
1. Non-judicial - the UK Parliamentary Ombudsman
2. Judicial - court proceedings
VIII. The UK Financial Services Compensation Scheme and the decision not to close
ELAS
IX.
The position of non-UK policyholders
1. Equitable Life's business in Ireland and Germany
2. Grievances of non-UK policyholders
a) Motivations for investing with ELAS
b) ELAS advertising
c) Allegations of mis-selling
d) Allegations of discriminatory treatment
e) ELAS information policy
3. Access to redress in the Member State of commitment
a) Supervisory authorities in the Member State of commitment
b) Financial Ombudsman schemes
c) Guarantee funds
4. Access to redress in the United Kingdom
a) Complaints to the FSA
b) Complaints to the FOS
c) The UK Parliamentary Ombudsman
d) The UK Financial Services Compensation Scheme
5. Court action
X.
Potential remedies for ELAS victims under EU law
1. The Third Life Directive
2. Primary EU law
a) The right to petition and complaints to the European Commission
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b) Regulatory liability under EU law
c) Action for damages under Articles 235 and 288(2) ECT
3. Coordination mechanisms at EU level
a) FIN-NET
b) CEIOPS
XI.
The case for a European class action lawsuit
XII.
The need to compensate ELAS victims
Conclusions
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I.
Introduction
Under this section of the report, the committee examines the damage or loss caused to
policyholders as a consequence of the crisis of the Equitable Life Assurance Society (ELAS).
It also identifies and assesses actions available to policyholders for obtaining redress, such as
required under indent 4 of the European Parliament Decision setting up the Committee of
Inquiry.
As regards damages, the committee does not, in view of the complexity of the issue and a lack
of access to relevant data, attempt to identify exact numbers but rather tries to obtain a picture
of the orders of magnitude involved and of the kind of situations in which policyholders find
themselves as a consequence of the ELAS crisis. The committee has received ample written
and oral evidence from aggrieved policyholders to this effect.
The report subsequently deals with some of the responses by the UK Regulator and the
Society itself to Equitable Life's crisis, which were relevant to aggrieved policyholders. The
following sections identify the routes of redress available to policyholders under UK law.
Firstly, the possibilities open to policyholders to claim damages from the Society are
analysed. The remedies referred to include both judicial procedures before the courts and nonjudicial remedies such as alternative dispute settlement schemes. Secondly, the report
examines ways for policyholders to obtain compensation from government both through the
courts and by alternative means. The routes to redress under UK law are scrutinized on the
basis of information received orally and in writing from witnesses and following research
undertaken by the committee. The report also makes reference to the experiences of aggrieved
policyholders in their efforts to obtain compensation.
The following parts of this section deal with the situation of policyholders who purchased
their policies from ELAS branches established in EU Member States other than the UK,
particularly Ireland and Germany. After identifying the particular grievances of these
policyholders, the report looks at actions undertaken in relation to ELAS by the respective
financial regulators in Ireland and Germany and assesses the situation of non-UK
policyholders as regards access to redress in both their own country and in the UK. Oral and
written evidence has been presented to the committee by aggrieved policyholders and
regulators from both countries.
The last part of this section deals with remedies available to policyholders under EU law.
Firstly, it investigates whether secondary law, such as for instance the Third Life Directive
itself provide for redress mechanisms. Secondly, the report focuses on the system of judicial
protection under primary EU law with regard to loss and damage caused to individuals by
breaches of Community law for which Member States can be held responsible according to
criteria developed by the European Court of Justice. Finally, the committee looked at
coordination mechanisms at EU level, such as FIN-NET, which was established to facilitate
the treatment of cross-border consumer complaints. The section continues with a reference to
class action lawsuits and concludes by making the case for ELAS victims to be compensated
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by the UK Government.
II.
Damages
1.
Policyholders affected
In his statement before the committee, current Equitable Life CEO Charles THOMSON (H2)
said that there were in 2001, when the events at Equitable occurred, "well over a million
people who had an interest in the [Equitable Life] with-profits fund". Mr STRACHAN (H4)
indicated that in 2000, there were approximately 1.7 million (with-profits and other)
policyholders in Equitable Life. In a written statement (WE 471), Mr THOMSON later
specified that in 2001, roughly 1.5 million people had an interest in the Society's with-profits.
This figure includes an estimate of the number of members of group pension schemes who are
not policyholders themselves and so represents an estimate of the total number of individuals
affected.
The vast majority of these were UK residents, but the Society also had about 8000 withprofits policyholders in Ireland (8300 according to Mr STRACHAN, H4) and about 4000
with-profits policyholders in Germany. "The EU aspect would therefore be around 1% of the
issue by headcount", according to Mr THOMSON (WE 472). In addition, there were
approximately 6500 international policies which were sold through the Society's Guernsey
office to individuals throughout the world (WE 473). Mr SEYMOUR, EMAG director with
responsibility for non-UK based policyholders, informed the committee in H7 that in the late
1990s ELAS had 13.405 non-UK policyholders, resident in 13 different Member States. In
WE 534, he provides an exact breakdown of policyholders per Member State. Besides Ireland
(6342) and Germany (3281), there appear to have been significant numbers of policyholders
in France (1069) and Spain (728). In written evidence submitted by EMAG in their petition to
the European Parliament, it is claimed that as many as 70.000 policyholders from outside the
UK were affected in total (WE 145).
Even though the numbers obtained vary slightly, it can be concluded from the evidence at
hand that the Equitable Life crisis affected a large number of people both within the UK and
in other EU Member States.
Ms KWANTES pointed out in H7 that Equitable Life's high reputation has attracted
policyholders from various professional backgrounds: "80% of the lawyers in the UK had
policies with Equitable Life ... Members of the medical profession, accountants, people
working for well-known business names, ... members of the police force, thousands of civil
servants and even Members of Parliament had policies with Equitable. So it really was
1
Page 1.
Page 1.
3 Page 1.
4 Annex A.
5 Page 7.
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thought of very highly." Mr WEYER (H3) stressed the high proportion, among German
policyholders, "of academics and persons who have either considerable professional
experience or are from the financial services industry itself". There has been a certain
perception that the majority of Equitable Life policyholders tend to be affluent individuals.
However, evidence received by the committee suggests that many policyholders are "small
individuals" (Ms KWANTES, H7), who have suffered badly due to the crisis at Equitable. An
Irish policyholder, for instance, told the committee delegation who visited Dublin on 6
October 2006 that she was forced to sell her house as a consequence.
Most policyholders affected appear to be of advanced age. Mr WEYER said that "the typical
German customer is, as we see it, a married pensioner aged around 65" (H3). Mr SCAWEN,
representing trapped annuitants stated in WE 231 that "we are all retired with an average age
in the mid seventies, some relative youngsters ..., active both physically and mentally, and
others reaching the end of their lives with all the associated problems of memory, physical
and intellectual frailty that comes with the ageing process".
2.
Collective losses
The total losses incurred by policyholders (and indeed the shortfall against policyholders'
reasonable expectations) cannot be quantified precisely. Mr LAKE, Chairman of the
Equitable Members' Action Group (EMAG), stated that the across-the-board cut of 16% to the
total value of all pension policies, which ELAS applied on 16 July 2001, equalled £4 billion.
Lord PENROSE indicates in WE 162 that the reduction intimated in July 2001 was valued at
£4.9 billion (including a separate adjustment of with profit annuity values of £630 million).
Additional market value adjustments have been imposed since then. Furthermore, the incomes
of about 45.000 so called with-profits annuitants have been cut continuously "to the point
where 35% decreases are now typical and incomes are still declining", according to
Mr LAKE (H1). The FSA stated that it has not carried out a calculation of total losses,
suggesting that this could only be done on a policy-by-policy basis (Mr STRACHAN, H4).
Furthermore, even if exact figures were known, it would be rather difficult to determine
which part of the losses can be attributed to mismanagement by the Society (and hence give
rise to possible claims) and to which extent they were a consequence of external factors, such
as the weak performance in financial markets at the time. Mr THOMSON (H2), claims that
"the only loss that is clearly due to the particular circumstances of Equitable Life is related to
the Guaranteed Annuity Rates (GARs) i.e. related to the Hyman judgement in July 2000".
Other losses would be market-related, namely due to sharp falls in stock-markets during the
early years of this decade, and would also have happened to a greater or lesser extent with
providers of other with-profits funds. Mr STRACHAN (H4) was also of the opinion that the
policy cuts were made principally because of the very sharp falls that had occurred in equity
markets. This view is contested by EMAG (see below).
Thus, in WE 473 Mr THOMSON points out that one "needs to be careful to define what is
meant by collective losses incurred by policyholders, [since] the with-profits policies are
1
Page 4.
Page 223.
3 Page 2.
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investment contracts and consequently are subject to investment losses as well as investment
profits in the normal course of business". He indicates that Equitable Life has assessed losses
caused by the Society's special circumstances in several ways (WE 47). Firstly, in connection
with the litigation against the former auditors and former directors1, it "took advice on
possible losses arising based on the value of the Society in 2001 if certain actions had been
taken earlier". This revealed losses of up to £2.05 billion to the Society (i.e. to members in
aggregate as owners but not to policyholders). Secondly, the society assessed the losses
suffered by policies without GARs as a result of the impact of GARs in connection with the
Compromise Scheme (see below2). The losses addressed by the scheme, which did not
however cover all non-GAR policyholders, amounted to £850 million. The Rectification
Scheme3, which corrected past retirements to allow for GAR, amounting to £103 million,
might also be taken into consideration. Total GAR related losses would be a maximum of
around 5% of policy value, according to Mr THOMSON (H2; WE 47), equalling around £1.5
billion at the time.
The Penrose report, however, concludes that over-bonusing was a significant cause for the
financial weakness of ELAS, which required the cuts in policy values (WE 16)4. Referring to
the report by Lord Penrose, EMAG stated that the latter calculated the cost of excess bonuses
actually paid away to departing policyholders during the 1990s at £1,800 million, to which it
would be necessary to add the (un-quantified but substantial) total excess bonuses included in
continuing policies in order to arrive at the total cost of over bonusing: "Whichever method is
used, over-bonusing resulted in Equitable Life being at least £2 billion short of assets,
representing about half of the policy value cut of 16th July 2001" (WE-CONF 16). The view
that declaring excess bonuses in the 1990s seriously weakened Equitable Life's finances and
that the policy value cut on 16 July 2001 was intended to recoup such excess bonuses is
strongly supported by evidence from accountant firms (WE-CONF 23 and WE-CONF 24)
and a legal opinion of Mr BOSWOOD (WE 76): "Whereas the stock market falls since
December 1999 might have accounted for around 5,6% of the 16% cut implemented, the
remainder was due to, first, the need to recoup GAR costs ... and, second, the need to
rebalance the With Profits Fund to bring assets in line with aggregate policy values ... The
real cause of the insufficiency of assets was not the fall in equity markets but, rather the
payment of excess bonuses during the 1990s".
Explaining how the need for the 16% cut of July 2001 had arisen, Mr SLATER highlighted in
WE 345 how, over more than a decade, EL had not balanced its policy values with asset
values, thus accumulating deficits each year from 1989 to 2000 (even very substantial deficits,
such as 28% in 1990 and 20% in 1994). As a result of this "policy of declaring total bonuses
in excess of actual investment performance encouraged hundreds of thousands of innocent
new investors and the Society expanded hugely. Equitable Life's senior management clearly
recognised the risks they were taking. On 27 June 2001 the new board of directors heard
Chief Executive Charles Thomson’s view of the level of surplus he would have expected at the
end of 1999. Thomson commented that at the beginning of 2000, the excess of policy values
over the value of assets was approximately 3%, which would have been within the acceptable
1
See also point IV.1.
See IV.2.
3 See also IV.3.
4 inter alia page 691.
5 Pages 3 and 4.
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range. In response to a question, Thomson confirmed that under normal actuarial principles
he would have expected there however to have been an excess in the value of assets over
policy values of perhaps 6-7% at that time. At the beginning of 2000 the Society was short of
assets (or had voted excessive bonuses) of about 10% (3%+7%) or £2½ billion. The loss of
the GAR case in July 2000 increased this shortage to £4 billion. This was approximately the
amount recovered by the 16% cut of policy values on 16th July 2001."
As outlined in WE 8, policyholders may, depending on personal circumstances, also have
incurred supplementary costs, such as penalties for early withdrawals, legal costs or
reinvestment expenses, in addition to damages they have suffered as a consequence of cuts in
policy values or annuity payments.
3.
Individual losses
The committee received numerous written representations from policyholders, which
illustrate their personal losses1 as a result of reductions in incomes or policy value. Moreover,
several witnesses referred to personal losses (Mr WEIR, H2; Ms KNOWD, H2; Mr
SCAWEN, H3) or illustrated 'typical cases' (Mr WEYER and Mr SCAWEN, H3) in their oral
testimonies before the committee. For instance, Mr SCAWEN representing ELAS annuitants
indicates that "my loss of income both to date and in the future is enormous. For many
annuitants, where their only source of income is from the Society, their future standard of
living has to decline and in many cases they will be seeking financial support from their
families or social security, or be forced to sell their homes in order to subsist. These people
prudently set aside money from their earnings to provide themselves with a comfortable
lifestyle during their retirement, a lifestyle that has been stolen from them by the Society"
(WE 232). While it is clear that the individual losses differ considerably, depending on the
class of policy, acceptance or not of the compromise agreement and other individual
circumstances, the evidence obtained by the committee confirms the view of Lord PENROSE,
who states in his report that "it is clear that many Equitable policyholders have suffered and
will continue to experience real financial hardship as a result of seeing the returns they had
expected from their savings very dramatically reduced" (WE 16)3.
Some witnesses also emphasised the worry and distress they have suffered in addition to their
financial losses. "I can tell you there were sleepless nights, there was tension ... this is not just
about legalities; there is a human story behind it" (Mr KNOWD, H2). Ms KWANTES in H7
struck a similar note: "[It] caused so much trauma to so many people. I have heard from so
many people who really have had sleepless nights over a long period of time. People have
become physically ill over it, which I think is very sad."
As mentioned above, the various classes of policyholder are affected to different degrees.
Generally speaking, policyholders without GAR's who had purchased policies after 1988 have
had to foot the bill for the implementation of the judgement by the House of Lords ("Hyman
1
See, for instance, WE-FILE 1, WE-FILE 2, WE-FILE 3, WE-FILE 4, WE-FILE 5, WE-FILE 6, WE-FILE 7, WE-FILE 8,
WE-FILE 9, WE-FILE 11, WE-FILE 12, WE-FILE 13, WE-FILE 14, WE-FILE 15, WE-FILE 16, WE-FILE 19, WE-FILE
20, WE-FILE 33, WE-CONF 3, WE-CONF 19.
2 Page 10.
3 Page 745.
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case"), which ordered the Society to meet its commitments to GAR policyholders. Among the
non-GAR policyholders, two groups seem to have been particularly disadvantaged: The first
group are the so-called late-joiners, who joined shortly before Equitable Life's near-collapse.
Some of them even joined after the House of Lords judgement as the "Society continued to
take in new business from after the decision of the House of Lords on 20 July 2000 until it
closed to new business on 8 December 2000" (WE-CONF 21). According to Mr WEIR (H2),
Chairman of the Equitable Late Contributors Action Group, the late joiners "were persuaded
to invest money with Equitable Life long after the society knew that it was in deep trouble ...
and later on were asked to pay for all the problems without having gained from any of the
supposed benefits". Similarly, EMAG argues in WE-CONF 16 that the 16% flat rate policy
value cut fell more heavily upon those non-GAR policyholders who joined late and had
therefore never benefited from the over-bonusing. This view is supported by Mr BOSWOOD
in WE 761. Mr THOMSON (H8) took a different view: "The reason for applying reductions
at a flat rate was to achieve greater fairness to all policyholders. That decision was taken by
the board having considered a range of options with the appointed actuary". The second
group is referred to as 'trapped annuitants'. As Mr SCAWEN (H3) pointed out before the
committee, "we cannot or are not allowed to transfer our policies to another provider. Thus,
the Society can reduce and has reduced our annuity payments by substantial sums, in my case
by some 40%, with the prospect of continuing reductions in my income for the rest of my life".
III.
Complaints to the UK regulators and official investigations
1.
Complaints to the FSA
After the events at ELAS, there has been continuing outrage and demand from the
policyholders for explanation and redress. According to EMAG's petition to the European
Parliament (WE 142), many of them complained directly to the UK regulatory authority in the
form of FSA (Financial Services Authority). EMAG says that the FSA rejected all complaints
(WE 143). The FSA's representatives before the committee did not make any specific
comments on the treatment by FSA of policyholders' complaints (H4) but rather referred to
the UK Financial Ombudsman as the competent body for dealing with such complaints. Mr
STRACHAN (H4) only noted in general that "we sympathise with the position of
policyholders and understand the strength of feeling that has led them to make a series of
complaints but we consider that these complaints reflect a misunderstanding of what
regulators could or should have achieved in a case such as Equitable Life". He added that "a
regulatory system neither can nor should aim at avoiding all failures".
WE 32 and WE 37 outline the FSA's regulatory objectives according to Section 2 of the
Financial Services and Markets Act 2000. Hence, the FSA is responsible, among other things,
for preserving both market confidence and consumer protection. Some policyholders have
expressed dissatisfaction with the way in which FSA has pursued the latter objective with
1
Page 3.
Page 28.
3 Page 28.
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regard to Equitable Life and put forward the strong allegation that the FSA has tried to
obstruct policyholders from getting redress and failed in its role to protect consumers. EMAG
claims in WE 44 that "the FSA is compromised in respect of investor protection because its
annual running cost ... is funded by the industry" and calls it "a body with monopolistic
control over consumer protection, whilst being in thrall to its industry paymasters".
Specifically, EMAG alleges that FSA had failed to impose a generic approach to
compensating aggrieved investors. It even accused the FSA of having "orchestrated a coverup" in order to avoid compensation payouts: "There has been systematic foreclosure of any
effective means of redress" (WE 44).
Naturally, the FSA strongly rejected these allegations (see WE 37): "I am aware that the point
has been made to this committee that, because it is funded by the industry, the FSA is
somehow "in the pocket" of the firms it regulates. I wish to place on record to this committee
that such concerns are entirely misplaced. We are a statutory regulator established by
Parliament; ... Regulated firms across all financial sectors must pay for the costs of
regulation. Our fee-raising powers are statutory and our fees are levied compulsorily on each
of the 33,000 or more firms we regulate according to a series of objective formulae and
measures. The FSA staff who supervise firms have no policy or operational involvement in the
fee-levying process, which is managed by a separate organisational function within FSA with
a separate management reporting line through to the FSA board."
In relation to the protection of consumers in general and ELAS policyholders in particular
Mr STRACHAN (H4) pointed out the following: "The FSA provides full information for
consumers about its objectives, plans, policies and rules. Consumers have access to the FSA
through its Consumer Helpline [and] our website is a further important source of assistance
for consumers, providing comprehensive information specifically for them on financial
products, regulation and their rights. Recognising the importance of issues surrounding
Equitable Life, and the large number of policyholders involved, this website brings together
information relevant to Equitable Life policyholders" (Mr STRACHAN, H4). Furthermore, he
noted that "we have taken initiatives for the benefit of Equitable policyholders since the
closure of new business." In this respect he referred in particular to the FSA's exercise of
influence on ELAS when the compromise scheme was devised (see section IV.2.)
In summary, individual complaints to FSA did not result in redress for aggrieved
policyholders.
1.
The Baird Report
EMAG informed the committee that the large number of complaints led the FSA to set up an
internal inquiry (WE 141). The inquiry was conducted under the leadership of its Director for
Internal Audit, Mr Ronnie Baird, in order to determine if the FSA had failed during the 23month period of its supervision immediately prior to the closure of ELAS to new business. Mr
BRAITHWAITE pointed out in H11 that it was precluded from looking at the period of
primary negligence from 1990 to 1998. Nor did the inquiry address the question of possible
redress for policyholders' grievances.
1
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2.
The Penrose Report
Policyholders also complained to HM Treasury according to EMAG's petition (WE 141). In
August 2001, HM Treasury set up an inquiry under senior judge Lord Penrose. His terms of
reference were to inquire into the circumstances leading to the Equitable Life crisis and to
identify lessons to be learned for the conduct, administration and regulation of life assurance
business. However, his inquiry (and thus the report published on 8 March 2004) did not
address two questions, namely, who is at fault for the problems encountered by the Society
and who deserves compensation as a consequence (WE 162). On the latter issue, Lord Penrose
notes that he had "invited individual policyholders to assist [him] by formulating their claims
in order to ... help form a view about the potential liabilities of the Society ..." and that the
information thus received "made clear that very substantial claims were involved" (WE 163).
However, Lord Penrose emphasises that he "cannot adjudicate on the policyholders'
complaints" and states that "the expectation that many have expressed that this report will
provide views on the validity of claims and their value will inevitably be disappointed" (WE
164). Nevertheless, Lord Penrose was keen to point out that the human impact of the events at
Equitable should not be understated and that "... damage [was] done not only to
policyholders' financial resources but to their self-esteem and their confidence in their ability
to manage their affairs" (WE 165). He concludes that "with few exceptions, those who have
suffered have been the innocent victims of this affair" (WE 16)6.
In conclusion, neither the Baird and Penrose reports nor any of the other official
investigations7 resulted in remedy for policyholders. Expressing the frustration of
policyholders, EMAG complains in WE 44 that "report after report has been published but
none had the remit to address culpability or authorise compensation".
IV.
Actions by ELAS in relation to aggrieved policyholders
This section examines actions undertaken by Equitable Life in response to the crisis and
whether these have served to bring relief to policyholders.
1.
Litigation
Firstly, Equitable considered pursuing legal action through UK or European Courts against
1
Page 29.
Page 744.
3 Page 744.
4 Foreword.
5 Page 285.
6 Page 745.
7 E.g. 'The Corley Report' (WE 50) or UK Parliamentary Ombudsman's first report ("The prudential regulation of Equitable
Life; 4th Report-Session 2002-2003).
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the UK Regulator. "We took legal advice as to whether the Society should be pursuing what
had gone wrong with the European Courts ... but were clear from the advice that we received
that there was no route open. ... We were also clear that there was no realistic prospect of
successfully suing the UK regulator" (Mr THOMSON (H2). ELAS provided the advice it
received from leading Counsel as WE 71. The document considers potential claims by the
Society and/or policyholders against both the prudential regulators and conduct of business
regulators. The law firm indicates that "we do not consider that legal action by the Society
against the regulators would be cost-effective" and therefore advised the Society "not to
proceed with such an action." As to the funding by the Society of claims by policyholders,
they "identified ... difficulties of bringing such claims and concerns as to whether the Society
can or ought to fund such claims" and concluded that "it is difficult to see how such a course
could be justified" (WE 71).
By contrast, "following consideration of the legal, audit and actuarial advice that [it]
received and with very strong backing from policyholders and from action groups", the
Society proceeded to pursue its former directors and its former auditors for alleged breaches
of duty "culminating in court proceedings [in 2005]" (Mr THOMSON, H2). The committee
has received a number of documents from the Court case ELAS vs. Ernst&Young (WECONF 14). According to the court documents, two types of breach were alleged. First, in each
of the years 1997, 1998 and 1999 it is alleged the statutory accounts should have included
very substantial technical provisions in relation to GAOs. Second, for each of the years 1998
and 1999 it was also alleged that the accounts should have disclosed contingent liabilities and
uncertainties in respect of the Hyman litigation. ELAS claimed to have suffered loss by not
selling the business and assets (either in September 1998 or 2000), loss of the chance of such
sales and loss by declaring bonuses which would not have been declared. Mr THOMSON
(H2) pointed out that the loss pursued through these proceedings was corporate loss, i.e. the
diminution of the value of the society as an entity and not individual policyholder losses.
Eventually the Society had to drop the case because it was not able to establish a causal link
between the alleged failures and the losses incurred. "To our great disappointment we were
unable to establish that loss has been caused that could be attributed to [the] defendants"
(Mr THOMSON, H2). In H8 Mr THOMSON deemed it "a pity that nobody can be held to
account for what happened" because he would have "some difficulty in believing that this was
entirely accidental" (H8).
Mr CHASE GREY, however, believes that the court actions by ELAS against its former
directors and auditors "were commenced ... not with the real intent of covering damages but to
distract policyholders, to divert press attention and most probably to incur further wastages
of time in the investigative process and the time allowed to policyholders under the
Limitations acts to commence compensation proceedings" (WE 401). "The ELAS Chairman ...
- by profession a lawyer - and (the)Chief Executive ... have each explained (in my view with
great hypocrisy) the need to discontinue these actions on the basis that ELAS in the course of
the proceedings had found that they were unable to prove loss, a point a competent lawyer
would have checked before proceedings commenced" (WE 402).
1
2
Page 4.
Page 5.
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In a letter of 2 December 2005 addressed to policyholders (annexed to WE 35), ELAS
provides the following explanations in relation to the litigation against former directors: "Your
board launched the claims based on careful consideration of detailed legal advice. In the light
of that advice, the Board considered that it would have been a dereliction of our duties as
directors and our responsibilities to policyholders not to pursue the claims on your behalf,
while it remained cost-effective to do so. We have continued to review the claims with the
legal team throughout, in order to ensure that we kept up to date with developments in the
strength and cost-effectiveness of the claims. Based on the firm advice of our legal team, we
concluded that we must settle the litigation against the former directors with as little
additional costs as possible. ... Clearly, this is not the outcome for which we have worked so
hard over the last four years and we are extremely sorry that we have been unable, through
the Courts, to secure redress for policyholders. Lord Penrose reached clear and forceful
conclusions as to the downfall of the Society. However, we must accept that it is a different
matter to satisfy a Court that the role of the former directors constitutes a responsibility that
leads in law to culpability and redress."
2.
The Compromise Scheme
The Compromise Scheme is dealt with exhaustively in Part IV of the report. However, given
its relevance for the situation of aggrieved policyholders, certain aspects of it will be revisited
below with particular emphasis on the concerns expressed by policyholders.
Section 425 of the UK Companies Act 1985 enables a company to put into effect 'a
compromise scheme of arrangement' between the company and its members or its creditors or
any class of them, subject to the consent of interested parties and of the court. The scheme
becomes binding if it is approved by a majority in number representing three-fourths in value
of the creditors or class of creditors or members or class of members and by the court (see ES
31). ELAS devised such a scheme with the intention of stabilizing the with-profits fund by
reducing exposure to GARs and, at the same time, eliminating the risk of legal action against
ELAS for mis-selling on the basis of alleged failure to disclose the GAR risk to prospective
non-GAR policyholders. In practice, it was proposed that GAR policyholders would get an
increase of 17.5% in their policy value in exchange for giving up their rights to a guaranteed
annuity rate. At the same time, non-GAR policyholders were offered an increase of 2.5 % in
policy values2 in return for giving up their right to pursue claims, either by legal action or
through the Financial Ombudsman Service.
According to ES 33, the Scheme was the result of an extensive consultation process involving
policyholders and regulators and was developed under intense publicity. EMAG called it a
"massive consultation process that was just cosmetic PR window dressing" (WE 75). In ES 3
it is also emphasised that there was a certain degree of time pressure because a payment of
£250 million by Halifax was conditional upon a compromise becoming effective by 1 March
2002. Hence, "the time available for the completion of the development and the approval of
the scheme was much shorter than a scheme of such complexity would normally require" (ES
1
Pages 27 and 28.
Annuitants were offered a 2.5% uplift on the Total Gross Annuity (see WE 23, page 19).
3 Page 30.
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31).
The Scheme finally met with the approval of an overwhelming majority of each class2 of
Equitable's policyholders. It is notable that Mr Justice Lloyd rejected the suggestion that
overseas policyholders should be treated as a separate class for the purposes of voting for the
compromise agreement.3 Nor were the with-profits annuitants treated as a separate class. The
compromise scheme took legal effect on 8 February 2002 after approval by the High Court.
The Society estimates that when the Compromise Scheme took effect, "there were still close
to a million people with an interest in the with-profits fund", although a significant number of
policyholders had left during 2001 (WE 474).
Equitable's Board claimed at the time that the Scheme involved "fair value compensation to
GAR policyholders based on a ‘realistic estimate’ of the value of their legal rights given up
..., it apportions the compensation to different GAR policyholders in accordance with their
rights; it reduces that compensation by the value of any possible claim for compensation
given up by the non-GAR policyholders and the compensation takes the form of a
proportionate increase in GAR policyholders’ policy values in both guaranteed and nonguaranteed form" (WE 295). By contrast, representatives of policyholders claimed that the
scheme was "inequitable"6 and that it "deliberately obfuscated and discounted legal advice
[indicating] that policyholders without [GAR] had a strong case for mis-selling"7. In
particular, EMAG considers in WE-CONF 16 that the first across-the-board cut in values of
16% in July 2001 - which in its view was not only a result of the lost GAR case and a fall in
stock markets but also (to a large extent) a consequence of a decade of over-bonusing by
ELAS - fell unfairly upon more recent non-GAR policyholders, who had not previously
benefited from over-bonusing as did pre-1990 (predominantly GAR) policyholders. As
outlined under point II.3., Mr THOMSON (H8) took a different view: "The reason for
applying reductions at a flat rate was to achieve greater fairness to all policyholders. That
decision was taken by the board having considered a range of options with the appointed
actuary". Mr BOSWOOD in his opinion (WE 768) supports the view of EMAG that the flatrate cut failed to take into account the over-bonusing to early policyholders. EMAG believes
that the Compromise Scheme had given ELAS an opportunity to rectify the situation. Instead,
the scheme proposed GAR uplifts of 17.5% against non-GAR uplifts of 2.5%. In his report,
Lord PENROSE declines to comment on the fairness of the Compromise Scheme (WE 169).
Moreover, policyholders told the committee that the increases in policy values were not
guaranteed: "Within a matter of weeks, the 2.5% increase magically turned into a 4%
reduction" (Mr WEIR, H2), so policyholders "lost their rights to redress in return for an
uplift which turned out to be a cheque that bounced" (Mr BELLORD, H2). Indeed, after the
uplift in policy values had been credited on 1 March 2002, the Society announced a further
1
Page 29.
GAR and non-GAR policyholders were in different voting classes.
3 The arguments for this decision are outlined in ES 3, pages 32 and 33.
4 Page 2.
5 see WE 29, page 19.
6 Addendum to petition 29/2005 dated 9 November 2005 concerning FSA and FOS; page 2.
7 A second submission to the inquiry conducted by Lord Penrose into the lessons that can be learned from the Equitable Life
debacle - a case study in serial regulatory failure by the government and its agent, the Financial Services Authority; EMAG;
27 March 2003; page 50.
8 Page 3.
9 Page 275.
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cut of 4% on 15 April 2002, which more than eliminated the 2.5% uplift credited to non-GAR
policyholders just six weeks before. The with-profits annuitants suffered a similar experience,
as the Society reduced the Overall Rate of Return by 4% subsequent to the approval of the
agreement. Therefore, some policyholders expressed doubts as to the legal validity of the
compromise agreement (see for instance oral statement by Mr WEIR, H2 and Mr SCAWEN,
WE 231).
In response, Mr THOMSON claimed that the Society had set out all details of the
Compromise Scheme in the accompanying documents. "The uplifts are very clearly set out in
the Scheme documents and had both guaranteed and non-guaranteed elements. Market
movements meant that we had to reduce non-guaranteed bonus subsequently. That risk was
clearly identified in the documents..." (WE-CONF 52). However, Professor BLAKE suggests
in WE 293 that the information provided to policyholders by the Board in connection with the
Compromise Scheme Proposal was inadequate. Among other things, he criticised that "most
of the information concerning the status of the fund was out of date, there was virtually no
information on what was going to happen to the fund after [the compromise scheme would
take effect and it] was not clearly spelled out what ... policyholders were foregoing by voting
for the [scheme]" (WE 294). Mr SCAWEN also claims that the full state of the Society's
finances had not been disclosed. Otherwise, with-profits annuitants would "surely not have
accepted the offer" (WE 235). EMAG criticised that "the Compromise documentation did not
address the over-bonusing, the benefit derived from it by GAR policyholders, the unfair
nature of the 16% policy value cut to non GAR policyholders [and] the possibility of a
compensating adjustment in favour of non-GAR policyholders" (WE-CONF 16).
Moreover, EMAG comments in detail on the second cut in policy values of 15 April 2002,
which more than eliminated the uplift credited to non-GAR policyholders. As stated above,
ELAS argued that this had become necessary due to "market movements". EMAG contends
that the market fell by about 6% (equivalent to a 3% fall in Equitable Life's asset values)
between July 2001, when the 16% cut was introduced, and April 2002, when the second cut
was made. However, "all of this fall happened before the Compromise Scheme was published
in December 2001 [and] there was no further significant market fall before the policy value
cut in April 2002" (WE-CONF 16). EMAG considers that by failing to explain to non-GAR
policyholders that, without an immediate surge in the stock market, a further policy value cut
would be required, ELAS may have deliberately misled policyholders. In contrast,
Mr. THOMSON insisted in H8 "that the markets carried on falling after the Compromise
Scheme was through in February 2002 and the board had no choice but to reflect those
changes in market values in the non-guaranteed benefits." Mr BOSWOOD (WE 766) agrees
with EMAG's assessment and suggests that "this is something which ought to have been
mentioned to those, including the court, from which approval for the scheme was sought". He
thus thinks it is possible that "those responsible deliberately concealed information which
they knew to be relevant to the scheme". In view of the above, EMAG asked the FSA to
investigate the issue. The latter however refused to do so with reference to its discretion (WE1
Page19.
Pages 1 and 2.
3 Page 6.
4 Page 6.
5Page 19.
6 Page 4.
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CONF 16).
Mr THOMSON responded to allegations that the compromise documentation had been
inadequate by underlining that the scheme was sanctioned by the High Court. He quoted the
judge as follows (H8): "I am in no doubt that it is a scheme such as an intelligent and honest
man, a member of the class concerned and acting in respect of his interest, might reasonably
approve. I am also satisfied that neither on account of any inadequacy of information or
otherwise in the procedure, nor in respect of any of the substantive points made to me, is there
the slightest reason to suppose that it is not a proper scheme which having been approved by
the requisite majorities of the various classes ought to be sanctioned by the Court. I will so
order."
Policyholders in general criticised the fact that the FSA recommended policyholders to accept
the compromise or even promoted it.1 "The FSA was party to the rush to push the majority of
the members of the Equitable to sign up to a flawed compromise, led on by insinuations that,
if the compromise were not agreed, The Equitable would collapse, and by the suggestion
(which has not been realised) that, if it were agreed, the fund would return to stability. ...
Those who did not go along with the compromise that was endorsed by the FSA and withdrew
their funds appear likely to end up better off than those who remained. In view of its
unequivocal endorsement of the compromise, this should be embarrassing to the FSA, since it
is supposed to protect the policyholders' reasonable expectations.2"
In his statement before the committee, Mr STRACHAN (H4) commented on the FSA's
involvement in the compromise: "The Compromise Scheme was undertaken as part of an
independent court process under the Companies Act. In that particular process, the FSA had
no formal statutory role". In WE 37 the FSA points out that it "nevertheless encouraged
Equitable to go beyond what was required by the Companies Act to ensure that policyholders'
interests were protected as far as possible, particularly through the appointment of an
independent actuary to opine on the fairness of the proposals". Furthermore, the FSA
"reviewed and assessed the Compromise Scheme proposals being put to Equitable Life's withprofits policyholders to ensure that the interests of all policyholders had been properly taken
into account" (WE-CONF 8). In doing so, the FSA took account of the following
considerations: "Firstly, that a successful compromise scheme would, in principle, offer the
best prospect of stability for Equitable Life and its policyholders. The second – which
concerns the fairness issues – was an assessment as to whether there was a fair exchange for
the rights and the claims of each group affected. The third consideration was that there
should be clear and comprehensive information provided to policyholders and, fourthly, we
took account of the independent actuary’s assessment of the proposal" (Mr STRACHAN,
H4). The independent actuary stated in his report that "from an actuarial point of view the
terms of the Scheme have been established in a fair and reasonable way" (WE-CONF 93).
Policyholders, however, alleged that the actuary failed to address a number of important
issues, which would have been important for policyholders' understanding of the proposal
(see WE-CONF 16) and furthermore questioned his independence from ELAS (see WE 75).
1
Addendum to petition 29/2005 dated 9 November 2005 concerning FSA and FOS; page 2.
A second submission to the inquiry conducted by Lord Penrose into the lessons that can be learned from the Equitable Life
debacle - a case study in serial regulatory failure by the government and its agent, the Financial Services Authority; EMAG;
27 March 2003; page 50.
3 Summary of the Independent Actuary's Report; page 125.
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In its assessment of the compromise scheme (WE 67) the FSA concludes as follows: "The
FSA is content that, in relation to the relevant groups of guaranteed annuity rate (“GAR”)
and non-GAR policyholders, the level of increase to policy values is a fair offer in exchange
for the GAR rights and potential mis-selling claims that would be given up. While there are
variations from person to person, within each relevant group, we are content that there are
no categories of policyholder within the groups who would receive disproportionately greater
or lesser benefits". The FSA furthermore suggests that, "the scheme of arrangements was in
policyholders' interests and was an appropriate way of removing the uncertainties that were
adversely affecting the firm; accordingly we saw no reason to make representations to the
court, which had final responsibility for the decision" (WE-CONF 8).
ES 31 does not comment on the fairness of the Compromise Scheme but rather points out its
advantages in general: "Firstly, it provided certainty for the parties concerned, shielding
policyholders (and Equitable) for extensive and costly litigation. Secondly, it met with the
approval of the regulator (FSA), the majority of members, and the court. Thirdly, it enabled a
deal with Halifax plc to materialise under the best possible terms. Fourthly, it seems
preferable to other alternatives, such as the winding-up of Equitable." The authors of ES 3
express their view that "on balance, an aggrieved policyholder is more likely to get
satisfaction through a system of collective satisfaction, such as the Compromise Scheme, than
through individual recourse to legal remedies", without further elaborating on this point.
In summary, evidence suggests that the primary aim of the Compromise Scheme of
Arrangement, which took legal effect on 8 February 2002 after it had been approved by the
requisite majority of policyholders and sanctioned by the High Court, was to remove legal
uncertainties and liabilities from Equitable Life and thereby stabilise the fund. The Scheme,
however, did not serve to compensate policyholders for losses they had incurred through the
2001 reduction in policy values, which was caused by a number of particular circumstances at
Equitable, including the Society's practice during the 1990s of paying excessive bonuses. In
particular, the uplifts in policy values granted to non-GAR policyholders, who in exchange
waived their right to pursue claims, were more than eliminated by subsequent cuts. Numerous
accounts suggest that the Society may have been aware at the time it proposed the scheme that
the uplifts in policy values could not be sustained under normal circumstances. However, it
failed to communicate this to policyholders, who may well have voted against the scheme,
had they been made aware of the full state of the Society's finances. The committee concludes
that the eventual result of the Scheme was such that all remaining policyholders lost their
right to pursue claims against the Society while their losses continued to increase.
3.
Complaints to ELAS and policy reviews
Mr THOMSON informed the committee that ELAS has in place an internal complaintshandling process, such as is required by FSA regulations. He said that since 2001 the Society
has dealt with over 40.000 complaints about a wide range of issues. Those complaints, which
related to "matters unique to the Society's situation ... have for the most part been dealt with
1
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via Policy Reviews" (WE 471). The Policy Reviews ('rectification scheme', 'non-GAR leavers'
scheme' and 'managed pension review') together addressed more than 100.000 cases, many of
which were identified and settled by the Society without a complaint being made by the
policyholder, according to Mr THOMSON (WE 472).
Firstly, the 'rectification scheme' (75.000 cases) compensated GAR policyholders whose
policies had matured before the House of Lords judgement ordered the Society to meet its
commitments to GAR policyholders. It gave them the benefits that they would have received
had the judgement been known at the time.
Secondly, the 'managed pension review' concerned 20.000 cases of contracts whereby the
policyholder is enabled to take an income from a pension policy without at that stage
converting the whole pension policy into an annuity. Financial journalist Mr BAIN, however,
claimed in H8 that "most of the ... cases in the managed pension review had been told they
were due no redress, with a minority having been offered tiny settlements". He gave an
example of a victim who was offered £522 of compensation by ELAS as a result of the
review. It was only after the victim threatened to take legal action that ELAS "[agreed] to pay
him GBP 81.907" according to Mr BAIN (H8).
Thirdly, the 'non-GAR leavers' scheme' addressed about 15.000 of non-GAR policyholders
who had taken out policies before the Compromise Scheme took effect. They were offered
compensation at the maximum of 5% level of loss, according to Mr THOMSON (H2). The
FSA indicated that it "oversaw [this] process of giving appropriate compensation to
policyholders who left Equitable too early to benefit from the Compromise Scheme"
(Mr STRACHAN, H4). Policyholders' representatives stressed that the offers made by the
Society individually or as a result of policy reviews were derisory, representing only a small
fraction of what people had actually lost. However, the vast majority of those concerned
accepted the offers made to them by the Society according to Mr THOMSON (H2). He said
that about 1.000 cases, where policyholders did not accept, were referred by the Society to the
Financial Ombudsman Service (see below).
Mr THOMSON (H2) pointed out in general that as a mutual society, Equitable must strike a
balance between the interests of the claimant and the interest of the other policyholders who
have to pay the claim. "When the Society pays redress, it can only come from current
policyholders, so we owe those a duty to refuse to make payments when no redress is
appropriate. ... Therefore, the Society had to separate the genuine claims from the
opportunistic ..." (Mr THOMSON, H2). Similarly, in H8, he stated that "overpaying claims to
those who shout loudest would be at the expense of those who remain behind ... so we are
always to balance that as fairly as we can."
V.
1
2
Allegations of fraud and the UK Serious Fraud Office
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In some of the written evidence received by the committee1 it is alleged that the Society's
stance and conduct has been tantamount to fraud. The Investor's Association states in WE 312
that they cannot prove that fraud occurred but that the available evidence would be
persuasive. The present working document does not deal with these allegations in detail. If
they were found to be true, however, this would help policyholders to substantiate claims and
obtain redress before civil courts. WE 313 suggests that the issue of whether Equitable Life, as
an entity, committed civil wrongs by deceiving policyholders would be relevant, since civil
legal action would in that case still be theoretically possible for policyholders even if action
on other grounds has already been timed out (see below). ELAS says that "we have looked at
allegations of fraud in great detail [but] have found no evidence that leads to a sustainable
case of fraud against the Society" (WE-CONF4).
Some policyholders indeed referred the allegations to the UK Serious Fraud Office (SFO)5.
According to Mr LAKE, the SFO was even asked by HM Treasury to consider the case. The
SFO states on its website6 that it is an independent government department that investigates
and prosecutes serious or complex fraud. It is part of the UK criminal justice system. The
Office is headed by the Director who is appointed by, and accountable to, the Attorney
General. The key criterion it uses when deciding whether to accept a case is that the suspected
fraud appears to be so serious or complex that its investigation should be carried out by those
responsible for its prosecution. Other factors include the value of the alleged fraud, whether
there is a significant international dimension, whether the case is likely to be of widespread
public concern and whether it requires highly specialised knowledge, e.g. of financial
markets.
Mr CHASE GREY states that the SFO informed him that the allegations he had put forward
would be considered in the light of the then ongoing civil action by ELAS against its former
directors and auditors. According to him, the civil actions by ELAS "had almost certainly
been commenced as a deliberate delaying tactic [and] to conceal the truth behind the ELAS
collapse" (WE 97). Furthermore, Mr CHASE GREY claims to have been informed by Mr
WEIR that, despite repeated requests by Mr WEIR, the SFO has failed to acknowledge
formally the receipt of a report8, which represents the most comprehensive account of the
alleged fraud, according to Mr CHASE GREY, and which had apparently been submitted to
the SFO by Mr WEIR (WE 99).
The SFO later decided not to investigate the case. Mr MAXWELL (H4) quoted from a press
release, which the SFO issued on 19 December 2005: "Following careful consideration of the
available evidence, including the Penrose Report and material held by the Society and
following the result of the Society’s case against its previous auditors and some of its former
directors, the Serious Fraud Office confirms that nothing has emerged which would justify a
1
See for instance WE 7, WE 8, WE 9, WE 25, WE 31, WE 33, WE 34, WE 40 and WE 42.
Page 2.
3 Page 7.
4 Page 2.
5 See for instance, written submission by Mr Chase Grey (WE 9), pages 3 and 4.
6 http://www.sfo.gov.uk/
7 Pages 3 and 4.
8 The report referred to has also been registered by the Committee as WE 7: Equitable Life: Penrose and beyond - anatomy of
a fraud. A paper by Dr Michael Nassim; 30 December 2004.
9 Page 4.
2
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full criminal investigation into the affairs of the Equitable Life Assurance Society". WECONF 30 contains a letter by the SFO to a policyholder explaining the SFO's decision: "This
decision was based on a thorough examination of the Penrose report and extensive enquiries
to determine whether there was sufficient evidence to commence a criminal investigation with
a view to prosecution. Our review took into account the outcome of the civil proceedings
brought by Equitable Life against its former auditors and former company directors and
officers. The test that SFO applies in such assessment is whether the evidence against any
individual or entity is sufficiently strong to give reasonable prospect of securing a conviction
before a jury. The offence or offences need to be proved beyond reasonable doubt. The SFO
review concluded that, respective of the evidence, the test would not be met."
Mr LAKE (H1) criticised that "bizarrely, the SFO took two years to decide that there was no
case to investigate despite the quite evident misrepresentations on Equitable's annual
statements to policyholders". Mr BRAITWAITE (H1), however, underlined that "there is no
insinuation from [EMAG] that the SFO did not look at the possibility that fraud had taken
place". In WE 311 it is claimed, however, that English criminal law on complex financial
frauds is in an unfortunate and ineffective state: "The SFO has great difficulty in obtaining
convictions and its track record is very poor".
VI.
Claims against ELAS for mis-selling
Allegations of mis-selling, which are outlined in more detail in Part III of this report, were put
forward to the committee by numerous policyholders orally and in writing. Customers were
reportedly never informed (or misled) by Equitable about the risks associated with the fact
that their funds were to be in a common pool with GAR-policies. In particular, those
policyholders who had purchased their policies in the late 1990s, when the GAR liabilities
became a material risk (in particular in the light of the ongoing Hyman case) complained that
they were not properly informed and therefore claim that ELAS mis-sold policies to them.
Policyholders also made other mis-selling allegations, i.e. that ELAS sales material claimed
that the 'with-profits' fund was smoothing out fluctuations in earnings and asset values (which
was not the case), and that ELAS aggressively pushed the 'churning' of existing ELAS
policies towards newer investment policies which were highly profitable for ELAS (as they
generated new business and commissions and required even smaller capital reserves).
It is worthwhile noting that some of the allegations made by policyholders were confirmed by
two former ELAS salesmen (see oral evidence given by Mr LLOYD (H5) and Mr POWER
(WE-FILE 2)) who claimed that they themselves were misled by the Society. Mr LLOYD for
instance, a salesman in the UK, told the committee the following: "I feel that we were all let
down by the board of Equitable Life. In my opinion, it had the duty to tell the policyholders
and the sales staff about the risks associated with adding further sums to the existing withprofits fund and I believe that those risks should have been known by 1998, and possibly
sooner. ... With hindsight, I believe I was misled about the risks associated with the with1
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profits fund. ... Obviously I did not at the time, but looking back now, I believe that something
should have been done to prevent further clients – other than those already in it – committing
money to a fund that had liabilities that were beyond its means. In hindsight, we were selling
the with-profits fund in a way that, from what we now know, was reckless both for income
drawdown and for with-profit annuities" (H5).
As regards with-profits annuitants, it is further alleged that it was not explained to the
purchasers at the time that a large part of their income was to be classified under the terms of
the annuity as 'un-guaranteed': "What neither the contract nor the product literature indicated
was that the Final Bonus Annuity could be removed in its entirety at the sole discretion of the
Society and that this element might represent after a few years as much as 50% of the annuity
income. It is inconceivable ... that anybody who understood this and was seeking a secure
income for life ... would ever have bought such a product" (WE 231).
Mr BAIN, financial journalist, in H8 drew the committee's attention to what he described as
an "orchestrated culture of mis-selling" in connection with so-called 'managed pensions'
which were introduced by the Society in 1995. These were income drawdown pension
policies, whereby the policyholder is enabled to take an income from a pension policy without
at that stage converting the whole pension policy into an annuity. This issue is dealt with in
detail in Part III of this report.
A number of policyholders consider they have a claim against the Society because they
suffered losses due to the Society's practice of over-allocating bonuses during the 1990s, as
Lord Penrose identified in his report (WE 162). Lord Penrose challenged the view that
problems at the Society were directly attributable to the problems of the Hyman litigation and
showed that the fund was largely in deficit during the 1990s, as a result of excessive payouts
by ELAS throughout this period. Following the publication of the report on 8 March 2004,
ELAS apparently expressed the view that it would have a strong defence if policyholders
sought to bring claims against it on the basis of Lord Penrose's findings (see WE-CONF 293).
The FSA subsequently carried out its own investigation with the support of external experts in
order to assess "the potential claims against the Equitable Life Assurance Society arising from
the report by Lord Penrose". The committee obtained a heavily edited version of the FSA's
assessment, which concludes "that there is not a significant risk that there will be successful
claims on the basis of the Society's bonus practice" (WE-CONF 294). However, no reasoning
or explanation for this conclusion is contained in this edited document. In July 2004, the FSA
published an information document with advice for ELAS policyholders about various issues
on its website (WE-FILE 29). In it the FSA confirmed its view that "generic claims against
Equitable Life regarding its basis for allocating bonuses during the 1990s are unlikely to
succeed" (WE-FILE 295).
Policyholders who believed they had claims against ELAS had the possibility either to seek
redress from the Financial Ombudsman Service (FOS) or to pursue legal action against ELAS
before the courts, provided that they were not covered by the Compromise Scheme or
1
Page 5.
Chapter 6.
3 Page 1.
4 Page 9.
5 Page 8.
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otherwise accepted an offer of compensation from the Society that ruled out legal action.
1.
Non-judicial - The Financial Ombudsman Service (FOS)
a.) Introduction
The committee received a memorandum prepared by the FOS (WE 271), which outlines the
involvement of the FOS in complaints made against ELAS and sets out the statutory and
regulatory scope of the FOS, its role, powers and responsibilities. Thus, the FOS was
established pursuant to the Financial Services and Markets Act 2000 (FSMA). It brought
together the six former regimes, including the Personal Investment Authority (PIA)
Ombudsman Bureau, which had previously covered various sectors of UK financial services.
Other rules made pursuant to the FSMA set out the jurisdiction of FOS and the procedure
which it must adopt in considering complaints. The FOS is also subject to transitional
provisions contained in both the FSMA and other UK Statutory Instruments, which cover the
handling of partly completed complaints under former schemes and complaints about facts
and omissions which occurred before the introduction of the FOS.
In the case of Equitable, the relevant former ombudsman scheme is the Personal Investment
Authority scheme operated by the PIA Ombudsman Bureau Ltd. This scheme required the
ombudsman to observe any applicable enactment, rule of law or relevant judicial authority.
The FOS must decide on complaints which were originally submitted to the PIA Ombudsman
in accordance with the PIA criteria and thus observe any applicable statute or case law. By
contrast, in the case of new complaints the FOS must adjudicate what is fair and reasonable in
all the circumstances of the case, taking account of any applicable statute or case law (see ES
32).
The FOS describes itself as an independent public body set up to resolve individual disputes
between consumers and financial services firms informally and as an alternative to the
courts.3 Consumers may lodge complaints with the FOS free of charge. Eligible complainants
are, in general, private individuals, small businesses and organisations in relation to
complaints which arise out of a customer or potential customer relationship. The complainant
is not required to live or be based in the United Kingdom. The FOS’s compulsory jurisdiction
extends to any authorised firm against which a complaint is made where the complaint relates
to an activity regulated under the FSMA and is subject to the compulsory jurisdiction rules.
Essentially, subject to limited exceptions, all authorised firms are subject to the compulsory
jurisdiction of FOS. Such jurisdiction covers acts or omissions by an authorised firm carrying
out a regulated activity, including acts of appointed representatives.
Before resorting to the FOS, a consumer is required to complain in writing directly to the firm
in question. If he is not satisfied by the firm’s response, he can bring the complaint before
FOS. The Ombudsman cannot consider a complaint if the complainant refers it more than six
months after the date on which the firm sends its final response or more than six years after
the event complained of or (if later) more than three years from the date on which he became
1
Memorandum prepared by the Financial Ombudsman Service for the EU Committee of Inquiry into ELAS; 31 May 2006.
Page 35.
3 http://www.financial-ombudsman.org.uk/about/index.html
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aware (or ought reasonably to have become aware) that he had cause for complaint. The
Ombudsman can consider complaints outside those time limits when, in his view, the failure
to comply with the time limits was as a result of exceptional circumstances or where the firm
does not object to the consideration of the complaint (see ES 31). The circumstances in which
the Ombudsman may dismiss a complaint without investigating it are laid down in DISP
3.3.12. Paragraph 18 gives the FOS broad discretion as he may dismiss a complaint without
considering its merits, "if it is satisfied that there are compelling reasons why it is
inappropriate for the complaint to be dealt with under the Financial Ombudsman Service"
(see ES 33) If, for instance, a single complaint raises issues with wider implications, e.g. a
large number of consumers are involved, action may be undertaken by the Financial Services
Authority on a large scale (ES 34).
If the FOS considers that a complainant has a valid claim, it can order the firm in question to
pay compensation. A determination by the FOS is final and binding on the firm, subject to a
maximum enforceable award of £100.000 plus interest.5 If the complainant is not satisfied
with the FOS's decision, he/she remains free to take legal action subject to any statutory
limitations on timing etc. If the decision is accepted by the complainant, it is binding.
A Memorandum of Understanding (MoU) governs the relationship between the FOS and the
FSA. This is dealt with in detail in WE 836: Among other things, the MoU points out that
"each is operationally independent and has distinct functions", it summarises the respective
responsibilities of the FSA and the FOS and provides a framework for cooperation. It also
contains provisions on information-sharing between the two bodies. In particular, the FOS has
"a responsibility to inform the FSA, where it sees indications of issues which may have
regulatory implications". Furthermore, it states that "where the FSA considers that issues of
regulatory relevance have arisen that may also be under consideration as disputes before the
ombudsman, it will alert the FOS to the issues and discuss any proposed regulatory action".
The MoU provides that "the FSA and the FOS will decide on how best to communicate with
consumers and with firms where the circumstances of a complaint, or complaints, give rise to
regulatory action by the FSA and where it is likely that steps will be taken to address the
generality of problems and concerns ...". The topics of the FOS's budget, financial
instruments and income setting are also dealt with by the MoU. Finally, the MoU provides
that "all directors of the FOS are to be appointed, and are liable to removal from office, by
the FSA", whereas "the terms of appointment of each Director must be such to secure his
independence from the FSA in the operation of the scheme". The FOS is to make a full report
to the FSA at least once a year.
b.) Treatment of Equitable Life complaints
Evidence suggests that the number of cases referred to the FOS amount to several thousand
(see for instance WE 147). The FOS itself states in its memorandum to the committee that it
1
Page 37.
Abbreviation for "Rules on Dispute Resolution" contained in the FSA Handbook.
3 Page 38.
4 Page 38.
5 The Ombudsman may recommend to a firm a payment of a higher sum that is not mandatory (WE 27, page 3).
6 Pages 12-17.
7 Page 33.
2
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"has received approximately 2700 complaints involving GAR related issues" and that
"approximately 1200 of these complaints have now been resolved". In addition, "about 400
complaints [concerning managed pensions] are currently pending with FOS" (WE 271).
Evidence submitted by Mr MERRICKS, on the occasion of the committee's visit to London
on 16 October 2006 (WE 56), suggests that the FOS has dealt with "over 6000 complaints
about Equitable Life" which would be "a smaller number than we have handled about some
other UK life companies". Some 2700 of these are GAR-related. He further indicates that
1843 complaints have been 'resolved'. In WE 90 the FOS clarifies that all of the 1843
'resolved' complaints were GAR-related. Of the 'resolved' complaints 917 were 'upheld', 889
were 'rejected' and 37 'not eligible'. There were at the time 930 complaints pending. A total of
50 complaints were Penrose-related and not therefore investigated (see below). Latest figures
submitted by the FOS2 indicate that by 31 March 2007 7377 complaints have been completed
and 752 are still pending. Awards of compensation have been made in 2087 of these
complaints.
In view of the high number of complaints received, FOS decided to group together cases
which appeared to involve similar issues and focus initially on investigating “lead cases” from
each group. The lead cases adjudicated by the FOS were the following3:

The "N case" involved advice given by Equitable in 1990. FOS dismissed the complaint
on the grounds that, at that time, the GAR risk was only theoretical.

The "H case" involved advice given before 20 March 1998. FOS dismissed the
complaint on the grounds that, although the GAR issue had been discussed in
professional circles at that time, there was no firm evidence to suggest that Equitable
was aware of it.

In the "E case", FOS upheld the complaint relating to advice given between September
1998 and July 2000 (the date of the Hyman judgment) on the ground that, at that time,
Equitable had knowledge of the risk and ought to have disclosed it to policyholders.

Similarly, in the "G case", FOS upheld complaints relating to advice given between 20
March and August 1998.

The "O case" involved advice given after the judgment in Hyman. FOS decided that
Equitable had no duty to advise specifically that the sale of the Society might fail and it
was justified in presenting the prospect of a sale in a positive light.
ES 34 outlines how the FOS calculated compensation in relation to the two lead cases it
upheld: "FOS held that Mrs E should receive compensation that should put her in the position
she would have been in if she had not invested with Equitable Life. Given, however, that the
stock market fell after the purchase of her policy, it would be unfair to compensate Mrs E for
losses due to falls in the stock market that would have affected all with-profits funds and
1
Pages 4 and 5.
2
See WE 90.
3
Each of the lead case adjudications is discussed in more detail in ES 3, pages 40 to 46.
4 Page 43.
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which she would have suffered if she had invested with an another firm. Compensation
therefore was to be assessed by comparing the return Ms E received on the money she put
into a with-profits pension with Equitable Life and the average return achieved by
comparable with-profits funds. In addition, Mrs E’s loss should include the reduction her
funds suffered when she transferred them from Equitable and an allowance for the costs she
paid to set up a new policy with another firm because she would not have suffered the
reduction or paid those costs if she had not invested with Equitable Life". The FOS seems to
have had wide discretion in devising the method for calculation of compensation, since, as it
stated in one of its adjudications "the law relating to the assessment of redress for financial
losses resulting from misinterpretation or negligent advice is in a lamentably uncertain state"
(see ES 31).
Thus, it appears that the FOS has ordered the payment of compensation to a number of
plaintiffs who had put forward GAR-related complaints. According to the statements of both
Mr THOMSON (H2) and Mr WEIR (H2), the amounts seem to have been higher in some
cases and lower in others, than the original offers made by the Society, for instance under the
non-GAR leavers' scheme, while others were awarded no compensation at all. The committee
has not been able to obtain information as to how many plaintiffs accepted the offers made
subsequent to the FOS's decisions.
Following the Penrose Report, policyholders sought compensation for the alleged 'overbonusing' identified therein. In its 'Penrose decision', the FOS decided on 22 March 2005 to
dismiss the complaints without considering their merits. In its memorandum to the committee
WE 272 the FOS provides the following explanation: "In certain circumstances, the
ombudsman may exercise a discretion to dismiss a complaint without a consideration of its
merits. This was explicitly envisaged in Schedule 17 paragraph 14 of FSMA. The
circumstances in which this discretion may be exercised are set out at DISP 3.3.1R. The
ombudsman exercised this discretion in respect of certain complaints about alleged 'overbonusing' by Equitable Life, after inviting consumers who had complained about this, and
other interested parties, to send him their comments and views and after then considering
them ... He concluded that there was a unique combination of circumstances here which
constituted compelling reasons why he should exercise his discretion under DISP 3.3.1R.
According to ES 33, the FOS indicated that it had reached that conclusion essentially on the
following grounds: Firstly, it was probable that the PIA Ombudsman would have dismissed
equivalent complaints since, under the rules applicable at the time, that Ombudsman had no
power to consider complaints to the extent that they concerned actuarial standards, the
method of calculation of surrender values, and bonuses. Secondly, the subject-matter of many
of the complaints was the subject-matter of court proceedings, disciplinary proceedings, and
other investigations. Even if no court proceedings pending at the time determined the issues
arising conclusively, it would be more suitable for these complaints to be dealt with by a
court. Thirdly, if FOS proceeded with investigations and determined the complaints in favour
of the complainants, it was likely that its decision would result in a stalemate. This is because,
if it found in favour of the complainants and awarded them compensation, the necessary funds
would have to be drawn from the with-profits fund. A major scheme of rearrangement of fund
1
Pages 50 and 51.
Page 3.
3 Pages 47 and 48.
2
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values would be necessary. The implementation of such a scheme would have to be the subject
of supervision by the FSA who would have responsibility to oversee the continuing solvency of
the Society and ensure fair treatment of all affected members. Thus, FOS’s decision would
give rise to a regulatory issue which would need to be referred to the FSA. The FSA, however,
had already reached the conclusion that no loss suffered by investors could be attributed to
the regulatory system. Finally, in deciding not to investigate the complaints, FOS took
account of the wide implications of any investigation that potentially might affect up to a
million people contrasted with the relatively small number of those who complained."
In WE 56, Mr MERRICKS makes the following general statement with regard to his
treatment of complaints concerning Equitable Life: "I should emphasise that our role in
relation to Equitable is limited to dealing with complaints about Equitable Life itself, and the
awards that we make when complaints are upheld are met from the Equitable Life with-profits
fund – that is to say they reduce the fund that belongs to other Equitable policyholders. As I
indicated in making an earlier decision, nearly everyone affected by the crisis involving the
Society has a grievance. All have suffered losses - judged at least against their expectations. It
would be impossible to say which group could be regarded as the more deserving of
sympathy, and thank goodness that is not what I had to do." The FOS's stance is echoed in ES
31: "It appears that FOS took into account, among others, two considerations: first, that
investor protection should be balanced with other interests; and secondly, that any
compensation to complainants will come from the with-profits fund and would therefore be to
the detriment of continuing policyholders. Thus, compensation claims were not a
juxtaposition of the interests of investors vis-à-vis the interests or funds of corporate
managers but a balancing exercise between the interests of two competing investor groups."
c.) Policyholders' criticism of the FOS's handling of complaints
A number of policyholders heard by the committee, such as Mr LAKE (H1), Mr
BRAITHWAITE (H1), Mr BELLORD (H2), Mr WEIR (H2) and Mr SCAWEN (H3) heavily
criticised the FOS's handling of Equitable Life - related complaints. "The FOS's treatment of
individual cases has been unfair, bizarre, partial to the Equitable and lacking natural justice
and accountability", said Mr LAKE (H1). Others referred to "obfuscations and general
obstructiveness" (Mr BELLORD, H2) and "a pattern of deliberate delay" (Mr WEIR, H2).
Mr SCAWEN (H3) said that "the Financial Ombudsman Service is ... part of the problem and
not part of the solution". The more specific criticisms put forward by policyholders against
the FOS's handling of their complaints can be summarised as follows:
Firstly, some policyholders expressed their dissatisfaction with the level of competence
shown by the FOS's staff in the course of treatment of complaints. In WE 232 Mr SCAWEN
states that "in my experience the staff are under-trained [and] do not have the legal financial
or pensions experience ... For example, I made a complaint ... and was told in return that my
claim was rejected due to the GAR compromise. Since I had very specifically ensured that my
claim in no way mentioned or referred to any aspect of the compromise, I wrote a strongly
worded letter back pointing out their error. In return, I received a reply saying they would
1
2
Page 51.
Pages 6 and 7.
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now consider my claim. The point I am making is that I am reasonably knowledgeable about
the issues, certainly more so than the overwhelming majority of policyholders. I suspect that
most claimants would have accepted this so-called 'ruling' and let the matter rest. This is not
an acceptable standard for a Government Department, which should have a clear duty to
ensure accuracy and fairness." Law firm Clarke Willmott is also highly critical of the FOS's
performance, stating that the required "degree of diligence" would "all too often" be "absent"
(WE 231): "A good example in our experience has been the large number of mis-selling
complaints made by Equitable With-Profits Annuity holders which were dismissed on the
grounds that they were 'GAR-related', i.e. subject to the Compromise Scheme made between
Equitable and its policyholders and sanctioned by the High Court on 8 February 2002. There
has been widespread injustice caused by the dismissal of these complaints. This is because
FOS failed to appreciate that the annuitants, writing their self-prepared complaints, believed
that Equitable’s problems were caused by its GAR liabilities (because that was what was in
the newspapers). They did not trouble, in our experience, to look deeper and find out what the
real nature of the complaint was, which in most cases was the suitability of the policy, with its
attendant risks" (WE 232).
An entirely different view on the FOS's approach is expressed in ES 33: "FOS processed the
claims efficiently, thoroughly and with due regard to procedural rights. It went at lengths to
ensure that all parties had a proper opportunity to be heard and an extensive consultation
process took place before final determinations were made." He went on to say that "there is
no evidence to suggest that the FOS [didn't] work diligently, as efficiently as possible in the
circumstances and with due regard to the interests of all parties involved".
Other policyholders referred to obstructions and delays in the treatment of their complaints by
the Ombudsman. Mr WEIR sought to underpin these allegations by quoting a letter he
claimed to have received from policyholder Mr DEPPE: "I complained to [the FOS] and
stated that With-Profits annuities instigated by Equitable Life in January 2001 had been
misrepresented by virtue of the fact that information relating to the existence of GAR's and the
liability they had created had been concealed. The FOS were initially reluctant to examine the
complaint on the basis of 'pressure of work'. They then lost the complaint, then I had used the
wrong form etc. They finally acknowledged the complaint 'as one they could look at'. The
complaint was then passed around the office and I sensed it was being passed 'upwards'. I
was then advised ... that Equitable Life had applied for their Compromise and they would not
look at my complaint in advance of the voting. I complained immediately that my business
was with the FOS in relation to a complaint about an existing complaint concerning
Equitable Life which they had acknowledged. The FOS, in the full knowledge of what
Equitable Life were doing, refused to budge. They now claim my complaint was compromised
by the compromise [agreement]. They have never once made any comment about the actual
subject that formed the basis of the complaint that I presented to them in 2001.” Mr WEIR
concludes that "Mr Deppe is now a 'trapped annuitant' unable to leave the fund or obtain
redress. Each year his pension is being reduced with little hope of improvement" (WE 64).
In relation to complaints concerning 'managed pensions', Mr BAIN (H8) criticised the fact
1
Page 25.
Page 25.
3 Page 49.
4 Pages 3 and 4.
2
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that the "FSA gave the FOS permission to freeze all ... complaints". "The Ombudsman had
frozen all the complaints and nobody was getting anywhere for a period of two to three years
which, I think, is certainly not the way any other customer at any other company with a
complaint in the UK has ever been treated" (Mr BAIN, H8). As pointed out by the FOS in
WE 271, it "wrote to those who had ... made complaints ... about the suitability of Managed
Pensions, closing our files on those complaints, pointing out that they would be included in
Equitable Life’s [Managed Pensions] review and explaining that they would have a chance to
refer their complaints to us again if they remained dissatisfied after their cases had been
reviewed." It should be noted that FSA had issued a waiver dispensing Equitable Life from
the need to investigate complaints about matters covered by the Review within the standard
timescales set out in the FSA Handbook2 subject to the condition of a written undertaking by
ELAS that "if it seeks to rely on the Limitations Act 1980 as a defence to any claim by an
eligible complainant, it will not count for the purpose of the Act any period within which the
eligible complainant's case has been subject to the provisions of the Review" (see WE 273).
However, a number of policyholders confirmed the statement made by Mr SCAWEN in (H3)
that, "in many cases, the FOS ruling takes so much time that by the time a decision has been
reached, the policyholder has become statute barred". Mr WEIR (H2) stated that he was
informed by the FOS in 2003 that if he were to make a claim on one of his policies before
court, the FOS would immediately drop consideration of all his other claims. "Now 2 years
later I have received an unsatisfactory offer, but I am timed out of any court action". He
suggests that "it is not a coincidence that the FOS took almost five years before attempting to
resolve my claim" (Mr WEIR, H2). IN WE 234 a UK law firm notes that "for the private
client, the alternative of suing in the courts after FOS has found against him is almost always
unavailable ... because the FOS is not quick, and ... by the time FOS issues a determination,
the three year time period ... under the Limitation Act ... may have expired." Mr BAYLISS,
Managing Director of 'Annuity Direct' said in H5 that "by and large, I would say that the
Ombudsman process has not worked well for people who have ended up there ... [but] ...
there are exceptions". He added that "in terms of the Ombudsman Service’s general role, it
has had an enormously steep learning curve and has not tackled very well the issue of
administrative costs and delays, which upset clients. It is beginning to do that." According to
Mr McELWEE (H3), delays by the FOS in the process of dealing with complaints were due to
its "hefty workload" but "have become highly problematic when it comes to limitation
periods".
Mr STRACHAN (H4) from the FSA says that, in many cases, complaints (to the FOS) can be
dealt with swiftly. "However it is very clear that where the complaints are complex ... that
goal may not be achievable and some of the Equitable complaints quite clearly fall into this
category" (Mr STRACHAN, H4). In this context it was also noted by both the FOS (see WE
27) and Mr STRACHAN (H4) that some of the delays of the FOS were due to the fact that
ELAS had sought extra time to prepare its response to certain complaints arising out of the
Penrose report and to prepare the Review concerning 'Managed Pensions' (see also previous
paragraphs). It was stressed, however, that the extensions granted did not count for the
purposes of the Limitations Act. ES 3 also comments on the issue of delays: "It is true that, by
1
Page 5.
Rules on Dispute Resolution (DISP) 1.4.
3 Page 5.
4 Page 24.
2
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its own admission, FOS was not able to meet the time-limit targets that it has set itself,
namely resolve 45% of complaints within three months and 80% within six months. Still, in
view of the complexity and the magnitude of the task involved, this should not be seen as a
failure of FOS. In some respects, delays worked to the advantage of Equitable as it prompted
some claimants to accept offers made to them by Equitable rather than wait for the
adjudication process to be completed" (ES 31).
Furthermore, policyholders criticised decisions of the FOS as partial, arbitrary and
inconsistent (e.g. Mr WEIR, H2). Similarly, law firm Clarke Willmott notes in WE 232 that its
"clients complain of decisions, which appear ill informed and capricious" and adds that "we
get the impression that a complaint to the Ombudsman is often little better than a lottery". In
relation to this, Clarke Willmott criticises the fact that, according to the FSA Handbook, the
FOS should make its decision 'on what appears fair and reasonable' and only 'take into
account' the relevant law and regulations (WE 233). The law firm claims that "all too often the
relevant law and regulations are ignored" and offers an example of a complaint which was
not upheld by FOS "in terms, which entirely ignored, to the point of not even mentioning
them, the LAUTRO conduct of business rules for life offices advising on pension transfers,
which, by common consent, had been grossly breached" (WE 234).
Mr WEIR (H2) claimed that, after having issued adjudication, the FOS announced that it
would allow Equitable Life or its agents to calculate the amount of redress that was due,
instead of forcing it to pay the compensation due as a result of its own calculations. In its
memorandum to the committee, the FOS indicates that "a major actuarial practice has
implemented the calculation methodology consistent with [the FOS's] decision, following
regular contact with an FOS actuary, whilst it was developing its loss assessment calculator"
(WE 275). Furthermore, Mr WEIR (H2) complained that "the FOS has ... refused to allow
claimants to see the basis on which Equitable Life calculated their losses, giving instead
examples which nobody can understand or verify". According to him, Equitable Life's
calculations were based on underlying fund values rather than actual payouts. He therefore
accuses the FOS of "allowing the provider to cherry pick from among different bases of
calculation, rather than arguing in any sort of consistent fashion" (Mr WEIR, H2). WECONF 32 further specifies these allegations and claims that the formula that FOS has allowed
Equitable to use would not be fair and may have been "deliberately designed to reduce the
cost of compensation". Mr YOUNG (WE 88) also complained about the methods used for
calculating redress. He refers specifically to the Mrs E lead case and quotes the FOS as stating
in its adjudication that "if Mrs E had received full and proper advice she would not have
invested with ELAS but would instead have invested with another firm's with-profits pension
fund that was not subject to similar risks", i.e. the GAR risk, in particular. However, in
calculating compensation, comparison was made with average returns from a number of other
pension providers including those that also had mixed their GAR and non-GAR policyholders
within the same with-profits fund according to Mr YOUNG. In his view therefore "this was
not a fair way to calculate compensation. ... The method[s] ... [used] in some of the lead cases
are fundamentally flawed" (WE 88).
1
Pages 49 and 50.
Page 24.
3 Page 25.
4 Page 25.
5 Page 4.
2
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The decision by the FOS to use its discretion and follow Equitable Life's recommendation not
to investigate at all so-called 'Penrose-related' complaints (i.e. complaints based on the
findings of the Penrose report) was subject to particular criticism by Mr LAKE (H1),
Mr BELLORD (H2) and Mr WEIR (H2). In his testimony before the committee
Mr BELLORD (H2) related his own experience, which he described as typical: "I complain to
Equitable that, due to certain facts being true, I am entitled to compensation. They reject my
clam and I am referred to the FOS. The FOS says they want to await the outcome of the
Penrose report. The Penrose Report confirms that the facts I have alleged are true. Equitable
complains to FOS that these facts are not true. The FOS decides that any complaint based
upon facts which the Penrose report says are true will be inadmissible and such complaints
rejected." The FOS states in WE 271 that "there was a unique combination of circumstances
... which constituted compelling reasons, why [the FOS] should exercise his discretion".2 ES 3
makes the following observations in this regard: "As the Penrose decision shows, FOS may
decide not to investigate the grievances of particular investors if the matter complained of
affects a large number of investors and calls for a regulatory approach. Although this
approach may be justified in the circumstances, it reveals a significant gap in judicial
protection because in practice there is a lack of alternatives for policyholders. The
identification of mischiefs in an inquiry, such as that carried out by Lord Penrose, does not
translate to concrete remedies for aggrieved consumers. Litigation is an uphill struggle
because of practical difficulties and high transaction costs, the substantive law is unclear
and, because of the requirements of materiality, reliance and the rules pertaining to the onus
of proof, it is loaded against the consumer" (ES 33).
Finally, policyholders generally questioned the FOS's independence, pointing out that it is
bound by the memorandum of understanding and claiming that it is essentially controlled by
FSA, which appoints the FOS' Board and controls its budget. (e.g. Mr LAKE and
Mr BRAITHWAITE, H1). Similarly, Mr SCAWEN in WE 234 claims that the FOS's
"primary obligation" would be "to the Financial Services Authority". "It is highly politicised,
effectively controlled by the FSA and Treasury with the apparent objective of keeping
Equitable functioning rather than servicing the public". The FOS rejects this by referring to
the "statutory requirement for the operational independence of FOS from the Financial
Service Authority" and asserts that "the Board of FOS does not attempt to influence or
interfere with quasi-judicial decisions that the ombudsmen are required to take" (WE 275).
Regarding the relationship between the FSA and the FOS, Mr McELWEE (H3) pointed out
their "quite discrete function": "The FSA does not handle consumer complaints and the
Ombudsman does not handle policy matters." The FSA in its submissions to the committee
(see for instance WE-CONF 76) also stressed the independence of the FOS as did
Mr THOMSON in H2 and H8: "The FOS is an independent entity that, from time to time,
disagrees with the Society and indeed, from time to time, disagrees with the Regulator, the
FSA. There are many in the industry who believe that the FOS is too consumer-oriented ..."
(H8). Mr BAYLISS (H5), when asked whether in his opinion the FOS was a creature of
1
Page 3.
The reasons given by FOS for dismissing Penrose related complaints are mentioned under point VI.1.b.) above.
3 Page 51.
4 Page 12.
5 Page 1.
6 Page 2.
2
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industry, stated that "I certainly do not think that it is normally the tool of the industry. There
are odd examples of that, but it tends to be because of the history of the individual rather than
the institution".
The most extensive and comprehensive account of the criticism expressed by policyholders of
the FOS's performance is contained in a report by Lord NEILL (WE 83). Although some of
the points he raises are equivalent to what is referred to in previous paragraphs, his review is
considered separately below.
Opinion of Lord Neill (WE 83)
Lord NEILL reviewed on behalf of EMAG "the nature of the service provided by the [FOS]
to [ELAS] complainant policyholders". In doing so he examined the correspondence relating
to the cases of 31 individuals who lodged complaints to the FOS and "who told EMAG that
they had been dissatisfied with the performance by the FOS".1 He also considered in detail the
FOS's decision to dismiss without consideration of their merits 50 claims characterised by the
FOS as 'Penrose-related'.
In determining the standards against which to assess the FOS's performance, Lord NEILL
took account not only of the "statutory provisions" contained in the FSMA and "the rules
made under the statute" but in addition also of "statements made by the FOS in its booklet
'your complaint and the ombudsman' and in FOS website communications as to the standards
which it aims to meet (WE 862). Thus, in summary, the Ombudsman was set up to (and/or
aims to) resolve financial disputes "fairly, reasonably, quickly, informally, independently and
impartially". He is "not bound by strict rules of law" but rather "determines what award, if
any, is in his opinion fair and reasonable in all the circumstances of the case". The
Ombudsman will "[apply] the rules of natural justice in [his] decision making" and "give
each side the opportunity to comment on the totality of the other side's case". Furthermore, he
will "do his best to ensure that there is a level playing field and that the superior wealth and
resources of one side do not give rise to an inequality of arms". Discretion vested in him will
be "exercised fairly and not arbitrarily and capriciously". A specific feature of the procedure
is that complainants do not need a lawyer and are even advised by the FOS that if they do
instruct one, they will generally be unable to obtain reimbursement of fees. The FOS will
"ensure that complainants are not disadvantaged by the lack of legal advice" (see WE 863).
After reviewing the 31 cases in relation to the specific points mentioned above, Lord NEILL
found that "nearly all complainants felt that in their dealings with the FOS they were arguing
with an advocate for EL rather than dealing with an impartial judge" (WE 864). "It is a body
which in many instances has displayed partiality towards the financial firm, in this case EL"
(WE 835). "At worst the [FOS] officials were seen as advocates for EL. In some instances
without any reference back to EL, they had come up with their own arguments to block the
1
The cases are documented in detail in Appendices 1-3 to his opinion (WE 83). A summary of the cases can be found in
Paragraph 150 of the opinion (pages 54 to 72 of WE 83).
2 Page 1.
3 Page 5.
4 Page 10.
5 Page 83.
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complainant" (WE 831). Lord NEILL identifies an "unlevel playing field" as the FOS "tends
to allow much more latitude to EL than it does to complainants" (WE 862) in terms of time
limits and given "the willingness of the FOS to resolve disputed issues in favour of EL, even
where the complainant relies on attested fact and EL replies with conjectures as to what
would/must have happened" (WE 833 and WE 864). He also suggests that FOS has done little
to avoid an 'inequality of arms' between complainant and firm by ensuring that the former
suffers no disadvantage from presenting a case without the advice of lawyers, accountants and
actuaries (see WE 835). As regards the principles of natural justice, Lord NEILL found that
they had been breached in "instances where the FOS took account of documents which a
particular complainant had not seen and could not address" (WE 836). Moreover, Lord
NEILL states that "many of the cases examined have involved unacceptable delay on the part
of the FOS in reaching a final decision, with some going on for more than five years" (WE
867) and that "the delays in processing complaints had a corrosive effect" as "complainants
lost confidence in the system and began to feel that the FOS was stalling" (WE 838). Finally,
he denounces "attitudes on the part of FOS officials which the complainants felt were
unhelpful, unnecessarily argumentative or even aggressive" as well as "the general
inefficiency of the FOS and the lack of concern with the fact of individual cases" (see WE
839).
Even some complainants whose cases were upheld seem to have been dissatisfied, due to the
'obscurity of financial awards'. According to Lord NEILL, "many complainants described the
difficulty - if not the impossibility - of understanding how awards are calculated". For
instance in the Mrs E lead case, a complex and sophisticated system was "designed by
accountant Deloittes on the instructions of EL" to calculate compensation. "Many
complainants cannot rework the figures because the necessary raw data has been withheld
from them [and] find it completely unfair to leave them in a position where they cannot verify
what is asserted by EL to be the 'correct' figure" (WE 8610). "Those who have complained to
the FOS about the low quantum and opaqueness of awards have been told that the FOS does
not provide a checking service and that it is for the complainants to come up with evidence as
to why the award is inaccurate and then themselves confront EL" (WE 8311). According to
Lord NEILL, "this involves an extraordinary reversal of the burden of proof. No court would
allow a litigant in person to be left in such a position of ignorance in relation to the
calculation of an award made in his or her favour. Nor would any court fail to police its own
awards in the manner in which the FOS does" (WE 8612). In close connection to the above,
Lord NEILL criticises that "instead of making awards itself, the FOS has put pressure on EL
to make an offer, [which] has enabled EL to impose conditions which are designed wholly for
its own advantage", such as confidentiality clauses or statements that offers were made
without admission of liability.
1
Page 83.
Page 13.
3 Page 81.
4 Page 13.
5 Page 81.
6 Page 72.
7 Page 11.
8 Page 83.
9 Pages 83 and 84.
10 Page 12.
11 Page 75.
12 Page 12.
2
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Special attention is given in Lord NEILL's report to the FOS's decision to use its discretion
and dismiss, without considering on their merits, all complaints which could be described as
Penrose-related. "Although in form his decision related only to the 50 complaints which had
reached the FOS, it effectively prevented thousands of other EL policyholders from referring
their complaints to the FOS at all" (WE 861). "The decision removed an avenue of free
recourse, leaving complainants only with the high cost risk option of instituting legal
proceedings before the court" (WE 862).
Firstly, Lord NEILL criticises the process leading to the Ombudsman's decision. According to
him, the FOS had sent to the 50 complainants for comment a letter by EL urging him to
exercise certain powers to dismiss (which in fact amounted to an application to strike out the
cases) without clearly identifying to them the powers whose exercise he was considering.
Therefore, without the help of lawyers, "complainants never had a fair opportunity to address
the case against them" (WE 863). Lord NEILL regards this as "the major example of the
breach of natural justice by the FOS" (WE 834). Secondly, as regards the Ombudsman's
decision itself, Lord NEILL recalls that one of the reasons he stated for dismissing the
complaints was that "there was a possibility that if relief were to be granted" it could result in
a "stalemate" because "some major scheme of rearrangement of fund values would be
necessary" which "would have to be implemented by an unwilling FSA" (WE 835). Lord
NEILL suggests that "it is not known upon what evidence" the Ombudsman made these
decisions because "he did not disclose it" (WE 836). Complainants therefore "obviously ...
could not comment on unknown opinions expressed by the FSA" (Lord NEILL, H11).
He contends that the FOS's decision "is the most striking example of an absence of
independence" of the FOS (WE 837). Corroborating this point, Lord NEILL quotes from an
internal Treasury e-mail which referred to a statement by the FSA "the main purpose" of
which would be "to provide the FOS with a basis for considering complaints relating to overallocation" (WE 868). He concludes that "the decision [by the FOS] could reasonably be
regarded by policyholders as one dictated to the FOS by the FSA and as one with disastrous
financial consequences for thousands of ordinary people who were waiting upon his ruling"
(WE 869). Lord NEILL also emphasised that the FOS's decision was inconsistent with
statements made on the day of the publication of the Penrose report and afterwards by the
then Financial Secretary to the Treasury, Ruth Kelly10, who "repeatedly assured MPs that the
FOS was standing ready to handle complaints based on the Penrose report and had the
necessary resources to do so" (WE 8611).
Overall, Lord NEILL concluded in the following way: "The policyholders whose cases I have
1
Page 8.
Page 10.
3 Page 9.
4 Page 72.
5 Page 41.
6 Pages 72 and 73.
7 Page 74.
8 Page 10.
9 Page 9.
10 For ministerial statements concerning the availability of the FOS to handle complaints arising out of the Penrose report, see
WE 83, pages 25-29.
11 Page 7.
2
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studied could reasonably conclude that the service provided by the Financial Ombudsman
Service fell short of the standards which they were entitled to expect (these being the
standards which the Service had itself proclaimed and advertised). ... Policyholders who had
Penrose-related claims (concerning the allocation and payment of excessive bonuses) had
good reason to be dismayed by the Chief Ombudsman's dismissal of their claims without
considering their merits, both as regards the process by which he reached his decision and as
to its content" (WE 831).
Chief Ombudsman Mr MERRICKS had the following to say in his initial reaction to
Lord NEILL's report (WE 87): "Lord Neill examined only 30 cases of the 8,000 that we have
completed. These 30 cases were solicited by the Action Group which asked its members for
instances where they believed they had had unsatisfactory outcomes. This was therefore an
entirely unrepresentative sample from which to draw any generalisations. We could equally
point to the very many consumers who have expressed gratitude for the way we have handled
their complaints about Equitable. ... In an episode in which very many people have lost money
not through their own fault, there will always be those who remain dissatisfied, and they are
likely to magnify and distort their concerns about public institutions in order to secure
redress for themselves from whatever source they can. They may even be tempted to launch
unjustified criticisms in order to draw attention to their plight. Lord Neill's report, paid for
and commissioned by the Action Group and focussing on a tiny unrepresentative sample of
cases, should be seen in this context."
The committee later received another response by the FOS in which it "rejects the main points
which Lord Neill made in his opinion and oral evidence" (WE 90). Furthermore, it criticises
the fact that "Lord Neill declined to receive information from FOS or to allow FOS to
comment on the 'facts' in his report before it was published"2 and claims that Lord Neill's
conclusions and criticisms are "based on false assumptions". Two "incorrect assumptions" are
mentioned by the FOS as examples3. It can be assumed, however, that if the two supposed
errors had not occurred this would not have fundamentally altered Lord Neill's main
conclusions. The FOS also underlined that it is truly independent and that Lord Neill failed to
produce evidence to the contrary, "because there is none" (WE 90). Finally, the FOS pointed
out that "if the ombudsman process had been as flawed as Lord Neill and EMAG have
wrongly suggested, that would have been grounds for EMAG to take judicial review
proceedings and ask the High Court to overturn the ombudsman’s decisions. Significantly,
EMAG did not do so" (WE 90).
1
Page 84.
2
In this respect Lord Neill's report states the following: "As regards the FSA and the FOS, I have had no
communications with these authorities save that on 11 January 2007 the Chief Ombudsman wrote to offer me any assistance
I needed in understanding the procedures of the FOS or other aspects of the way they work. I replied on 18 January 2007
thanking him for his offer but saying that I needed no assistance on the topics mentioned" (WE 83, pages 84 and 85).
"In paragraph 85 Lord Neill says - “it is likely that [the chief ombudsman] will have been supplied with a copy
of the [Penrose] Report shortly after it came into the hands of the Treasury on 23 December 2003”. In fact,
neither the chief ombudsman nor anyone at FOS saw the Penrose Report until March 2004. In paragraph 98(7)
Lord Neill says that the chief ombudsman failed to make available to complainants the FSA’s “Maxwellisation
submission to Lord Penrose”, which Lord Neill assumed the chief ombudsman had received. In fact, neither the
chief ombudsman nor anyone at FOS has ever seen this document" (WE 90).
3
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***
In summary, evidence shows that some policyholders who alleged that they were mis-sold
policies were able to obtain redress through the FOS, while others were not. There are
conflicting views about whether the amounts of compensation awarded were appropriate and
just in that they reflected the real losses policyholders had suffered due to the events at
Equitable. It appears that the FOS has not been able or willing to ensure in all cases that the
amounts of compensation were calculated in a manner transparent enough to enable them to
be verified by complainants.
The FOS's decision to dismiss, without considering their merits, complaints based on the
findings of Lord Penrose revealed a significant gap in judicial protection and made apparent
the limitations of the FOS, when dealing with complaints, where his adjudications might have
regulatory implications. Evidence suggests that the FOS did not take this decision
independently from the UK regulator, who had apparently expressed the view that the Penrose
report did not give rise to mis-selling claims. There is overwhelming evidence that
policyholders were deeply disappointed by the decision, not least because they had been led to
believe by ministerial statements that the FOS would be available to handle complaints arising
out of the Penrose report. As a consequence of the FOS's decision, a whole category of
complainants who had potentially valid claims in relation to over-bonusing was left without
alternative to costly and risky litigation.
There is some evidence to suggest that, in dealing with complaints, the FOS did not only base
its decisions on the respective merits of each complaint but also took into account policy
objectives other than investor protection. It is clear from the evidence received that the FOS
has been concerned about the impact of its decisions on remaining policyholders of the
mutual fund. Its decisions (on whether or not to consider a complaint, on whether or not to
uphold a complaint and, if applicable, on the amount of compensation due) appear to have
been influenced by these considerations. Hence, the objective of protecting individual
policyholders by rewarding appropriate redress may have been compromised in some
instances by competing objectives.
Finally, there is strong evidence that a number of complainants were dissatisfied with the
service provided to them by the FOS in general, claiming, among other things, that it
displayed partial behaviour towards ELAS. There seems to be consensus that some aggrieved
policyholders have suffered in various ways from the delays, which occurred in the treatment
of their complaints through the FOS. In some cases, complainants became time barred form
taking legal action as a consequence. Whichever reason there was for the delays, they
constituted an obstacle in policyholders' efforts to obtain redress.
Overall, although it awarded compensation to a limited number of policyholders, the FOS
cannot be said, in general, to have constituted an appropriate means of redress for the
grievances of those Equitable Life policyholders who suffered injustice as a consequence of
Equitable Life's crisis. While it is questionable whether the FOS would have the capacity, or
indeed be the appropriate institution, to seek a generic solution, the lack of out-of-court
alternatives left many aggrieved policyholders in an entirely unsatisfactory situation.
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2.
Judicial - civil proceedings before UK courts
Policyholders had the possibility of pursuing the Society through the English courts, provided
that they are not time barred under the UK Limitations Act (see below). Furthermore, they
were required not to be covered by the Compromise Scheme or otherwise have accepted an
offer of compensation from the Society that ruled out legal action.
a.) UK legal bases for claims against ELAS
ES 31 provides an overview of UK legislation, on which policyholders might base possible
claims against ELAS. The legal background may be summarised as follows:

Section 62 of the Financial Services Act 1986 provides a civil right of action where an
investor has suffered loss as a result of a breach by an authorised person of certain rules.
At the material time, Equitable was authorised by LAUTRO and subject to its rules. A
non-GAR policyholder would have a cause of action if (1) under LAUTRO rules, the
Society was required to disclose the existence of the GAR risk to prospective
policyholders, (2) the Society failed to disclose the risk and (3) the policyholder relied
on the non-disclosure. Finally (4), the policyholder must show that he or she would have
declined to take the policy offered by Equitable Life if the risk had been disclosed. ES
32 contends that "ELAS was required [under LAUTRO rules] to disclose the existence of
the GAR risk to prospective policyholders". It furthermore states that "it is highly
arguable that the Society failed to disclose the risk since in material circulated by the
Society, there was no specific reference to it". A key question, however, in this respect
would be to determine the point in time when the GAR risk became material and
therefore gave rise to an obligation to disclose. Issues of reliance and causation would
be more difficult to establish and the onus lies with the policyholder (ES 33).

A non-GAR policyholder could also have a remedy for misrepresentation arising under
the Misrepresentation Act 1967 or under common law. In order to establish a claim, (1)
there must be a material representation of facts made by Equitable to policyholders in
relation to bonuses or returns on their share of the with-profits fund, (2) the
representation must be untrue, (3) there must be no proof that Equitable Life had
reasonable grounds to believe and did believe that the facts represented were true and
(4) there must be reliance on the representation such that it induced the policyholder to
enter into the contract, Finally (5), there must be causation, i.e. that the policyholder
would not have taken out a policy with Equitable if the representation had not been
made to him. The Society's policies did not have any express terms dealing with the
existence and possible effect of the GAR policies on the returns of non-GAR
policyholders. Hence, they may only have a valid claim "if the Society had made any
implied representations or promises to prospective non-GAR policyholders or by listing
expressly a number of factors under the heading 'Risk Factors' in the key features
document, the Society is taken to make an implied representation that no other risks
1
Pages 54 to 64.
Pages 55 and 60.
3 Pages 54 to 60.
2
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existed or for a negligent misstatement and advice under the common law rule of Hedley
Byrne v. Heller [1964] AC 465" (ES 31).

Furthermore, a non-GAR policy holder might have a contractual claim against the
Society if it could be said that there was an implied contractual promise or warranty that
there are no further facts to disclose other than those contained in the Key Features
document, i.e. if there was a contractual duty on the part of the Society to disclose the
GAR risk. "Such a contractual duty however does not appear to exist. It is not expressly
laid down nor may be established as an implied term or warranty. The information and
representation contained in the Key Features document do not form part of the policy.
The statements made therein are not intended by the parties to be contractual promises
given by the Society" (ES 32).
In summary, therefore, "a non-GAR policyholder may have a claim against Equitable under
section 62 of the Financial Services Act 1986 or for misrepresentation or for negligent
advice" according to ES 33. "By contrast, in general, an action in contract would be difficult
to succeed" (ES 34).
b.) Limitation period
As outlined in ES 35, legal action as described above is subject to certain limitation periods
under the Section 2 of the Limitation Act 1980: The limitation period for claims based on tort
is six years from the date when the cause of action arose. This limitation period applies to
claims under section 62 FSA and section 2(1) of the Misrepresentation Act 1967. The cause
of action arises where a policyholder first sustains loss. An action in negligence in common
law (negligent advice or misstatement) is six years from when the cause of action accrued or,
if later, three years from the date on which the plaintiff first had both the knowledge required
for bringing an action for damages in respect of the relevant damage and a right to bring such
an action.
In relation to Equitable Life it is to be noted that, shortly after the Penrose Report was
published, the Society sought extra time to prepare its response to certain complaints arising
out of it. For this reason, on 10 May 2004, the FSA issued a waiver dispensing Equitable Life
from the need to investigate complaints about the matters arising within the standard
timescale applicable under FSA rules. A condition of this waiver was that Equitable Life
provided “a written undertaking that, if it seeks to rely on the Limitation Act 1980 as a
defence to any claim by an eligible complainant whether in Court or Ombudsman
proceedings, it will not count for the purpose of that Act any period within which the eligible
complainant’s case has been subject to this direction”. The FSA originally granted the waiver
until 30 June 2004, and subsequently extended it to 30 September 2004. Although this meant
in practice a prolongation, by some months, of the limitation period, the overwhelming
majority of policyholders would by now be time barred under the Act. According to
1
Page 61.
Page 62.
3 Page 17.
4 Page 17.
5 Pages 62 and 63.
2
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Mr SCAWEN (H3) all ELAS policyholders have been time barred since the end of 2006.
c.) Court cases
Civil legal action could be started in the county court or in the High Court, depending on the
circumstances of the case. If the claim is for £15,000 or less, it must be started in the county
court. If the case is a simple one, the county court will decide to use the small claims
procedure and will allocate the case to the ‘small claims track’. In most cases, the court will
not order solicitors’ costs to be paid by the losing party in a small claims case. If a claimant
instructs a solicitor he/she will have to pay the costs. For this reason most claimants deal with
a small claim without the help of a solicitor. If the value of a case is £5,000 or less, it will
generally be allocated to the small claims track.
Mr WEIR (H2) and Mr SCAWEN (H3) indicated that some policyholders have taken this
choice and launched claims through the Small Claims Court or threatened ELAS to do so. He
recalled, however, that that the maximum value of the case is essentially restricted to £5,000
and that therefore the amounts involved, and thus possible compensation, would be limited.
A vast majority of policyholders' claims would have to be dealt with by the High Court.
However, as policyholders pointed out, the claimant would have to meet the defendant's cost
in the event that the Court decides in favour of the Society (Mr LAKE, H1; Mr WEIR, H2;
Mr SCAWEN; H3). In ES 31 it is noted that "litigation is an uphill struggle because of
practical difficulties and high transaction costs, the substantive law is unclear and, because
of requirements of materiality, reliance on the rules pertaining to the onus of proof, it is
loaded against the consumer". Mr SCAWEN (H3) suggested that the potential costs of
pursuing a claim against the Society lie outside the financial resources of the overwhelming
majority of policyholders. In addition, he stressed that it would be difficult to find lawyers and
barristers who understand the complexity of the relevant pension provisions.
IN WE 232, Mr SCAWEN illustrates the problem of costs facing plaintiffs in the English
courts: "If I decided to sue the Society for compensation, then I am advised that my risk for
costs, in the event that my case went to trial and was lost, would be of the order of £150,000
on each side--£300,000 in all (EUR 440,000). Apart from the fact that I do not have that sort
of risk money, as my claim is only of the order of £70,000, (EUR 101,000), it does not seem to
be a cost effective approach. ... With data that I have had access to it is clear that the costs of
pursuing a claim against the Society to the point at which the Society settles out of court vary
from £56,000 to £180,000, with an average of approximately £101,000. Clearly this lies
outside the financial resources of the overwhelming majority of British citizens, quite apart
from the risks of paying an equivalent sum to the Society’s lawyers if they lose or give up
under the stresses and strains of the legal process."
Mr SCAWEN suggests that the problem is recognised by the legal profession in the UK
quoting from a report3 on the civil justice system in England and Wales: "The defects ...
1
Page 51.
Page 7.
3 ACCESS TO JUSTICE Final Report by The Right Honourable the Lord Woolf, Master of the Rolls; July 1996; Final
Report to the Lord Chancellor on the civil justice system in England and Wales.
2
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identified in our present system were that it is too expensive in that the costs often exceed the
value of the claim; too slow in bringing cases to a conclusion and too unequal: there is a lack
of equality between the powerful, wealthy litigant and the under-resourced litigant. It is too
uncertain: the difficulty of forecasting what litigation will cost and how long it will last
induces the fear of the unknown; and it is incomprehensible to many litigants. Above all it is
too fragmented in the way it is organised, since there is no-one with clear overall
responsibility for the administration of civil justice; and too adversarial as cases are run by
the parties, not by the courts and the rules of court, all too often, are ignored by the parties
and not enforced by the court“ (WE 231). WE 23 includes a letter sent by a law firm to the
FSA in answer to a consultation paper. It notes the following: "A lawsuit in the High Court
concerning a financial services mis-sale, which is defended up to the point of trial, can cost
anything from £30,000 to £150,000. Few business clients, and even fewer private clients, can
afford this kind of outlay. ... The uncertainty of the outcome and the risk of paying the other
side’s costs are a significant disincentive."
"Apart from a small number of relatively wealthy claimants, this approach is more or less
closed to the average policyholder in the UK", Mr SCAWEN (H3) concluded. The evidence
obtained from both EMAG (H1) and Mr WEIR (H2) suggests that only a few high net-worth
individuals and groups have issued court proceedings or threatened to do so against ELAS.
Naturally, the committee sought to obtain evidence as to the number of court cases issued by
policyholders against ELAS and the outcome achieved. It therefore contacted several
witnesses asking them to make available court documents and judgements. In response, it
received a copy of one claim for rescission and damages for misinterpretation and/or breach
of statutory duty issued on 13 May 2002 by a policyholder who had invested more than
£850.000 in 2002, which was reportedly settled in full before the hearing (see WE-CONF 15).
Apart from this document, no written evidence on court cases initiated by policyholders was
received. Mr BAIN (H8) reported a case where a complainant, who had allegedly been missold an income drawdown pension policy was offered a compensation of £522 by ELAS.
After he threatened ELAS with legal action, the Society agreed to pay him £81,907, according
to Mr BAIN.
Mr WEIR stressed that "to my personal knowledge, everyone [who instructed lawyers or
launched claims] was settled in full before their case ever got to court". "In other words,
Equitable Life was well aware that it would lose in open court and that it would open the
floodgates to more claims" (Mr WEIR, H2). Likewise, Mr LAKE (H1) stated that cases were
always settled at the cost of "gagging agreements which prohibit any wider discussions of the
terms of the settlement" (Mr LAKE, H1). Mr SCAWEN confirmed this, stating that "to the
best of my knowledge all of these cases have been settled out of court, prior to trial under very
strict confidentiality clauses" (WE 23/22). Another policyholder put it the following way:
"The point about all ... cases is that they were never heard by the court because they were
always settled in full the day before with a confidentiality agreement. Once a 'reasonable
offer' has been made, the court would not allow the plaintiff to have their day in court and
could even award costs against them. So it is very hard to see the truth. Equitable’s strategy
has been to scare away potential litigants by threatening to run up high legal costs which they
1
2
Page 22.
Page 5.
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would have to pay if they lost. Secondly, they would never allow a case to get into court
because they know they would lose and that would encourage others to launch a claim as well
as forcing disclosure of evidence they would prefer did not come into public view" (WECONF- 12).
Mr THOMSON merely stated before the committee that "a number of cases have been
pursued through the UK courts" and that "in all of those cases, appropriate compensation has
been paid..." (H8).
Thus, the committee lacks information about the exact number of cases initiated by
policyholders against ELAS in the past. Evidence seems to suggest that there has not been any
judgement because cases were usually settled out-of-court under confidentiality clauses. As
regards ongoing cases, the committee was made aware by Mr SCAWEN (H3) that a group of
with-profits annuitants is currently pursuing claims against the Society. He explained that the
group has developed a mechanism by which the claimants "mutually insure" each other if one
or more of the cases failed and that the claim was only made possible by a law firm which
was willing to take on the case on a 'no win, no fee' basis. In addition, the committee was
informed that one Irish policyholder has commenced litigation and that another case is said to
be pending before a German court (see below).
In summary, the launch of court proceedings against ELAS under Section 62 of the Financial
Services Act 1986 or for misrepresentation or for negligent advice was, in theory, a possible
route for aggrieved policyholders to obtain redress. In practice, however, circumstantial
evidence suggests that only few affluent policyholders took this route and consequently
reached settlements with the Society, whereas the significant financial risks under the UK
legal system prevented the average policyholder from suing the Society. Furthermore, since
the main events at ELAS date back to 1998-2000, virtually all aggrieved policyholders are by
now time barred under the UK Limitations Act. In practice, therefore, for the vast majority of
policyholders, the Financial Ombudsman Service had been the only source of civil justice.
VII.
Claims against the UK regulator
Aggrieved policyholders could, in theory, base their claims on alleged failure of the UK
Regulator to protect policyholders by exercising supervision of accounting and provisioning
practices and the financial situation of Equitable Life in accordance with UK law. The
allegation that the UK regulatory authorities failed in respect of prudential supervision has
been put forward by numerous witnesses orally (see for instance Mr LAKE, H1; Mr WEIR,
H2; Mr BELLORD, H2; Mr JOSEPHS, H2, Ms KWANTES, H7, Mr SEYMOUR H7,
Mr BRAITHWAITE, H11) and in writing (see for instance WE 4, WE 7, WE 8, WE 14, WE
15, WE 36, WE 44, WE 51, WE 52). These are covered in Part III of this report.
Some witnesses suggested that the regulator not only failed to fulfil its supervisory functions
but also misled policyholders who had approached them in relation to Equitable Life.
Mr VINALL, for instance, claims in WE 43 that he contacted the FSA in early 2001 at a time
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when the solvency problems faced by ELAS became apparent and were widely reported in the
press throughout the UK. He asked questions about solvency and reserve levels and claims to
have been told by the FSA that there was no reason for concern, when in fact the problems
should have been known to the regulator. In his opinion, the FSA have misinformed
policyholders. As a result, they stayed with ELAS longer than they would otherwise have
done and suffered further losses.
Mr VINALL's subsequent complaints to both the FSA itself and the UK Complaints
Commissioner were not upheld. The FSA claimed that it was not in a position to assert that
there were no problems at ELAS and that there was an onus on consumers to make their own
decisions with regard to ELAS (WE 43). It also pointed out that in making judgements about
imposing restrictions on firms, the FSA must take into account the wider impact these may
have on the market and on consumers generally. Similarly, the Complaints Commissioner
noted that regulators have to err on the side of caution when they make judgements.
"Hindsight may well show that caution to have been misguided but that does not mean that
the initial judgement was ill considered, let alone biased" (WE 43). The Complaints
Commissioner further emphasised that the FSA is tightly constrained as to what it can and
cannot say about third parties, since it could be sued by the company if the information turned
out to be incorrect and damaging. The UK Parliamentary Ombudsman (see below) is
currently considering complaints by many individuals, who allege that they "were assured by
the FSA that there was no reason to be alarmed as to the solvency of the Society" (WE 43).
There are two possible avenues available to policyholders to obtain compensation for alleged
failings of the regulator.
1.
Non-judicial - the UK Parliamentary Ombudsman
Complaints to the UK Parliamentary Ombudsman constitute the first possibility for aggrieved
policyholders to obtain compensation. A memorandum of the Parliamentary Ombudsman to
the Petitions Committee sets out in detail the Ombudsman's role in general and with regard to
the ELAS case in particular (WE 12). Thus, "the Ombudsman's role is to consider complaints
(referred to her by a Member of the House of Commons) from individuals who claim to have
suffered an unremedied injustice as a result of maladministration on the parts of the bodies
falling within her jurisdiction in the discharge of their administrative function. Where the
Ombudsman finds that maladministration has caused (or has contributed to) an unremedied
injustice, she will make recommendations to remedy such an injustice. However, the
Ombudsman has no power to compel a body to accept her recommendations. Nevertheless,
her recommendations are normally accepted and a suitable remedy provided. Where it does
not happen, the Ombudsman may bring this to Parliament's attention by means of a special
report."
EMAG states in its petition that in 2001, more than 600 UK policyholders demanded an
investigation by the Ombudsman (WE 141). Following the investigation, the Ombudsman
concluded in her report published in June 2003 that there was no maladministration on the
part of the prudential regulator. However, subsequent to the publication of the Penrose report,
1
Page 28.
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a second investigation was launched (despite reported opposition against it from the FSA1),
covering a wider period and with powers to investigate also the actions of the Government's
Actuary Department (GAD). This investigation is currently ongoing.
The terms of reference for the Ombudsman's investigation are "to determine whether
individuals were caused injustice through maladministration in the period prior to December
2001 on the part of the public bodies responsible for the prudential regulation of the
Equitable Life Assurance Society and/or the Government's Actuary Department; and to
recommend appropriate redress for any injustice so caused" (WE 122). The Ombudsman will
not investigate whether the UK regulatory regime at the time was properly conceived or
whether it meets the requirements of EU law but only whether it was properly administered. It
is also important to note that her investigation only covers the period up to 1 December 2001,
as the FSA, which was established as the sole regulator from that date, is not a body within
her jurisdiction. Likewise, the Ombudsman can only inquire into the actions of those charged
with the prudential regulation of ELAS; she cannot consider complaints about the conduct of
business or marketing issues because the self-regulatory bodies that were responsible for such
regulation are not - and have never been - within the Ombudsman's jurisdiction.
A number of witnesses pointed out the importance of the Ombudsman's investigation.
Mr THOMSON (H2) took the view that the Ombudsman's report is the policyholders' best
hope for compensation. Likewise, Mr TERTÁK (H1) stated that "[the Commission] have
consistently taken the view that the second report of the Ombudsman offers the best chance
for victims of Equitable Life to obtain redress". Commissioner McCREEVY in H8 confirmed
this: "The report represents the best chance – perhaps the only chance – for aggrieved
policyholders and pensioners to receive compensation". Policyholders seem to agree on the
significance of the Ombudsman's report and urged the committee to wait for it to be published
before making its own final report. However, they also pointed out the limited coverage of the
Ombudsman's investigations: "The Parliamentary Ombudsman's remit is not broad: it
excludes the FSA; it excludes half of the regulatory regime concerned with marketing and the
conduct of business and it excludes Equitable itself" (WE 44).
Furthermore, they expressed concern as to whether the UK Government would implement a
scheme giving effect to possible recommendations by the Ombudsman to pay compensation.
In this context, they referred to a recent case on occupational pensions, where as many as
125,000 people lost significant parts of their defined benefit occupational pensions when such
schemes wound up between April 1997 and March 2004 without sufficient funds to pay the
benefits promised. In March 2006, the Parliamentary Ombudsman published a report,
'Trusting in the pensions promise', which found that Government maladministration had
meant that those who suffered loss had not realised the risks they ran and had been denied the
opportunity to reduce them. She recommended that the Government should consider whether
it should make arrangements for the restoration of the core pension and non-core benefits of
those affected. The UK Government rejected both the Parliamentary Ombudsman's finding of
maladministration and her recommendation.
The UK Parliament's Select Committee on Public Administration was highly critical of the
1
2
Addendum to petition 29/2005 dated 9 November 2005 concerning FSA and FOS; page 10.
Annex B.
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government's position on this issue and expressed concern about the implications it may have
for the Ombudsman's constitutional role: We agree with the Ombudsman that
maladministration occurred. Government information about pensions was deficient and
reasonable people would have been misled. Moreover, the Government should have
considered the Ombudsman's recommendations properly, rather than immediately assuming
that they would place large burdens on the public purse. This is the second time in less than
12 months that the Ombudsman has reported to Parliament that she has found injustice that
has not been, or will not be, remedied. Only four such reports have ever been made. The
system established by the Parliamentary Commissioner Act 1967 will only work if there is a
common understanding between the Ombudsman, Parliament and Government as to what
constitutes maladministration, and who has authority in identifying it. The Government has
been far too ready to dismiss the Ombudsman's findings of maladministration. Our
investigations have shown that these findings were sound. It would be extremely unfortunate if
Government became accustomed simply to reject findings of maladministration, especially if
an investigation on this Committee proved there was indeed a case to answer. At the heart of
every case of maladministration is someone who has suffered injustice. By concentrating its
energy on denying findings of maladministration, rather than on considering what remedies
might be practical and proportionate, the Government has caused further distress to
complainants. It has delayed any resolution of their problems."1 The government maintained
its position in its response to the conclusions and recommendations in the Select Committee’s
report.2
As Mr BRAITHWAITE (H11) informed the committee, some of the victims sought a judicial
review of the decision to reject the Ombudsman's findings and her recommendation before the
High Court. In its judgement of 21 February 2007 (see WE-FILE 303), the court quashed the
Secretary of State's rejection of the Ombudsman's finding of maladministration and directed
him to reconsider the Ombudsman's recommendation.
A number of policyholders expressed deep concern: "Given this precedent, it must be
uncertain whether compensation will follow a finding of maladministration by the UK
Parliamentary Ombudsman", said Mr LAKE (H1). Ms KWANTES (H7) struck a similar
note: "My concern is that the Government can very easily do the same thing when the
Parliamentary Ombudsman reports on Equitable Life, and that is a real concern. ... My
feeling is that, if a government can just ignore what is recommended with such impunity, it
makes a total mockery of the ombudsman system." Mr SCAWEN states in WE 23/24 that
"recent experience does not encourage confidence". He added that "it is no help to us if there
has been maladministration if at the end of the day, the Government takes no notice of the
report and takes no action to compensate victims of its incompetence" (WE 23/25). Similar
concerns are expressed in WE-CONF 19 by Mr NEWMAN. Mr SEYMOUR (H7) referred to
a newspaper article quoting Mr THOMSON who apparently said that he was 'not overly
Public Administration Select Committee: "The Ombudsman in Question: the Ombudsman’s report on pensions and its
constitutional implications"; Sixth Report of Session 2005–06; Ordered by The House of Commons to be printed 20 July
2006.
http://www.publications.parliament.uk/pa/cm200506/cmselect/cmpubadm/1081/108102.htm
2 The Government Response to the Public Administration Select Committee’s Sixth Report of Session 2005–06 The
Ombudsman in Question: the Ombudsman’s report on pensions and its constitutional implications [HC 1081].
3 Judgement on Case No: CO/4927/2006.
4 Page 6.
5 Page 6.
1
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hopeful' that the Parliamentary Ombudsman's report would lead to compensation. In H8
Mr THOMSON explained his statement: "There are two preconditions to the payment of
government compensation arising from the Parliamentary Ombudsman’s report: firstly that
the Ombudsman should find maladministration leading to injustice to policyholders; and
secondly that the Government accepts those findings and the recommendation for
compensation. My comment reflected that the second does not automatically follow from the
first."
The publication of the Ombudsman's report was originally foreseen for spring 2006 (see WE
12). Subsequently, publication of the report was postponed until the end of 2006. By letter of
16 October 2006, the Parliamentary Ombudsman announced a further delay, announcing that
the report will not be published before May 2007 (see WE-FILE 19).
2.
Judicial - proceedings before the court
Aggrieved policyholders could also take legal action against the regulator before the UK
courts. However, as Mr LAKE (H1) pointed out, "the obstacles in the way of ... a citizen
obtaining redress in the UK courts are formidable". "Against the regulator, the citizen must
prove misfeasance, which is a very high hurdle", he said. Likewise, Mr SEMOUR noted in
H7 that "public bodies such as the regulator have Crown immunity from prosecution, and that
action within the Member State against the Government for remedy would have to pass a high
legal hurdle of proof of misfeasance". "Misfeasance means effectively that the Government
could do something wrong, and is not liable, unless it can be proven it was done maliciously.
It is a major hurdle to get over" (Mr SEYMOUR, H7).
In addition, Mr LAKE (H1) stressed that court action against the regulator would entail a
considerable financial risk for aggrieved policyholders, similar to what has been noted above
in relation to possible court proceedings against the Society. WE 44 by EMAG makes the
following observation in this regard: "The British Government can be relied upon both to
maximise its legal costs and to use every available appeal process - with the intimidating risk
of the Government’s legal costs being awarded against complainants. Tens of millions of
euros would be needed to sue the UK Government and this is evidenced by the cases of BCCI
against the Bank of England1 and by the shareholders in Railtrack who, before being
permitted to sue the UK Government for misfeasance, had to pay into Court €3.3m - only
made possible with the help of a major financial institution, which would certainly not be
available in Equitable’s case."
As mentioned under point IV.1. ELAS instructed a law firm to advise it on the merits of
possible claims by the Society and policyholders against the various regulators of the Society,
after the Penrose Report was published. Following the advice, which was made available to
the committee in WE 71, it decided not to pursue such claims. WE 71 identified a number of
potential claims against the prudential regulators2 and assessed the likelihood that these could
be successful:
1
Detailed information on this case can be found in ES 3, page 94.
Prudential regulators at the relevant time were the Secretary of State for Trade and Industry acting through the Department
of Trade and Industry (up to 5th January 1998) and thereafter HM Treasury, the relevant functions of which were contracted
out to the Financial Services Authority (FSA).
2
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
Breach of statutory duty under the Insurance Companies Act 1982 (ICA). WE 71
considers that the Society does not have any claim in this regard, "since (i) it cannot be
said that the regulator failed to consider whether to exercise its powers of intervention
under the ICA 1982 or that no rational prudential regulator could have acted in the way
in which it did; and (ii) the ICA 1982 does not confer private law remedies on the
Society".

According to WE 71, the Society would not have a claim in common law negligence
either, "since (i) there is nothing in the Report to indicate that anything which the
prudential regulators did, or forbore from doing, fell outside the ambit of their powers;
and (ii) the regulators had no duty to hold the Society harmless from any loss which it
might have suffered as a result of the shortcomings in prudential regulation identified in
the Report".

Claims for misfeasance in public office would also be unlikely to succeed, according to
WE 71: "There is nothing ... to suggest that any one or more of the individuals
employed by the prudential regulators exercised power unlawfully, specifically
intending to injure the Society, or with reckless indifference to the possibility of such
injury."
Pursuant to the Financial Services Act 1986 (FSA), the conduct of business regulator1 has
limited statutory immunity. Thus, claims against it are precluded by the FSA 1986 unless the
act or omission is shown to have been done in bad faith (see ES 32). ES 33 concludes that "an
aggrieved policyholder would face a Herculean task as he would have to prove, at the very
least, knowledge of illegality and of probability of injury on the part of the regulator". The
authors of WE 71 point out that "we do not consider there to be anything ... to support a claim
of bad faith."
Hence, on the basis of UK law, there does not appear to be any realistic prospect for
aggrieved policyholders to be successful in making the regulatory authorities liable for their
losses. Unsurprisingly, the evidence obtained suggests that no case has been brought against
the regulator so far.
According to ES 34, there are good reasons why regulatory liability should be recognised only
in exceptional circumstances: "The regulation of the financial services industry is a highly
complex matter ... and the regulator is called upon to pursue and balance a number of
divergent and sometimes contradictory objectives, including investor protection, market
stability and market efficiency. It must therefore enjoy wide discretion in the exercise of its
functions so as to be able to prioritize competing objectives as the public interest requires. Its
discretion should not be fettered by the fear that, in case a policy choice proves wrong or
unlawful, it may be liable in damages. ... Furthermore, where an action in damages is
successful, it is ultimately the taxpayer who is called upon to cover the costs." For these
1
The conduct of business regulator at the relevant time was the Personal Investment Authority, the relevant functions of
which were contracted out to the FSA.
2 Page 92.
3 Page 18.
4 Page 105.
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reasons, supervisory liability is restricted in all EU Member States, albeit to varying degrees.
In normative terms, the exceptional character is expressed through requirements such as 'bad
faith' (e.g. Ireland, UK) or 'gross negligence' (France).
The authors of ES 3, however, believe that despite the points made above, complete
regulatory immunity of financial services regulators would not be desirable. In this context ES
3 states that "the concept of gross negligence or manifest and grave disregard of discretionary
powers provides a better criterion than the concept of bad faith [which applies under UK
law] because it is not reliant on the motives of the regulator and is more susceptible to
objective determination" (ES 31). He also notes that "a distinction may ... be drawn between
regulatory functions and supervisory functions; it would appear easier to hold a regulator
liable for decisions made at the operational level of supervision rather than for decisions
involving regulatory policy choices."
VIII. The UK Financial Services Compensation Scheme and the decision not to close
ELAS
The UK has a statutory fund of last resort for customers of authorised financial services firms,
set up by the Financial Services and Markets Act (FSMA). This is the Financial Services
Compensation Scheme (FSCS), which can pay compensation if an insurer is in default, i.e.
has insufficient assets to meet claims or is insolvent. The FSCS is funded by levies on firms
authorised by the FSA. In WE 62, the then Financial Secretary to the Treasury, Ruth Kelly, is
quoted as saying: “In the event that Equitable Life were to be subject to insolvency
proceedings, there is now a statutory safety net, provided by the financial services
compensation scheme, which would pay out 90 per cent of guaranteed policy values".
However, the scheme was not available to Equitable Life victims, since the company was
never declared insolvent. Policyholders alleged that it has been the intention of the UK
government "to keep Equitable Life afloat at any price ... avoiding any cost to the Financial
Services Compensation Scheme; avoiding any cost to the rest of the financial services
industry", and thus "avoiding insolvency at any price ... to ensure that the losses ... are borne
by the investors" (Mr WEIR, H2). Mr WEIR (H2) claimed that at the time of the compromise
in early 2002, ELAS was actually "technically insolvent", but "it was being kept on life
support to avoid the government or the financial services industry having to bail it out".
"Effectively, the strategy was to keep the sheep in the pen long enough for them to be
slaughtered" (Mr WEIR, H2). Mr SEYMOUR struck a similar note in H7: "When it was
realised that ELAS could not match its immediate contractual liabilities to its assets,
discussions started as to the insurance rescue fund, which would have entailed a tax or levy
on all other insurance companies to compensate ELAS policyholders. The UK regulator then
approved a system of including five years of theoretical future profits to balance the books of
a closed company – ELAS – thus rendering impossible access to the compensation fund."
1
2
Page 106.
Page 5.
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ELAS rejects these allegations, stating that the fund has never been 'technically insolvent' (see
WE-CONF 51). Mr DAYKIN and Mr STRACHAN (H4) also emphasised that the company
has always been solvent. Mr THOMSON pointed out that "the insolvency question relates to
the capacity of the company to pay its guarantees; while the solvency position of the company
was extremely thin for quite a long period up until about 2003, I still believe that it was never
insolvent at any point in time that I can identify (H8)." In H2 Mr THOMSON furthermore
suggested that there has been "a common interest that we do not want to see the company to
become insolvent". According to him, had the company become insolvent, the prospects for
policyholders would have looked substantially worse. In H8 he repeated this view: "There is
the suggestion that it would have been better for the Society to become insolvent. This option
was dealt with in the documentation for the Compromise Scheme in 2001 and it was obvious
then, and it remains so now, that liquidation would have produced a much less satisfactory
outcome for policyholder." Regarding the decision not to close Equitable Life,
Mr STRACHAN (H4) pointed out that the FSA considered that "on balance, the interests of
the one million or so existing Equitable policyholders were better served by allowing the
company ... to continue for new business".
In this respect, Lord PENROSE notes the following: "Following the House of Lords' decision,
when considering whether the Society should close, regulators were faced with competing
interests. It is a legitimate and necessary part of prudential regulation that the interests of
existing and potential policyholders may need to be balanced, and I do not find fault with the
regulators for arriving at the conclusion that they did, although I am concerned that FSA and
GAD did not have sufficient independent knowledge and understanding of the Society's
business to justify their confidence that a sale could be achieved. Nor do I consider that the
decision reflected a conflict between prudential and conduct of business objectives, a
suggestion that is based on a misunderstanding of the nature of prudential regulation.
However, the regulators proceeded on an assumption that if anyone were disadvantaged by a
decision not to close the Society, compensation would be available. No legal assurance was
sought that this would be so, and there was no examination of the legal issues involved. There
was no recognition recorded that if compensation claims were sustained, those claims would
be at the expense of the with profits fund, nor any attempt to quantify the risks to which
potential policyholders were exposed relative to the benefit claimed by management for
continuing to trade. No consideration was given to measures that might have mitigated the
potential for subsequent claims of misrepresentation. The Society was permitted to continue
its advertising, and so those taking new or further policies with the Society did so by
invitation and not as mere volunteers without the risks of doing so being made known to them.
In the course of maxwellisation it has been represented that criticism of regulators' actions
and decisions relating to product sales fails to give adequate weight to FSA's power to
require a scheme under which affected policyholders would be compensated without need for
litigation. This misses the point that steps could have been taken to protect late joiners in
advance. The Society required them to disclaim any potential benefit from the sale of the
business. A reasonable counterpart would have been to have protected them from loss by
allowing an option to transfer out without penalty in the event of the sale process failing.
Thought for the cohort at risk would have identified the need for protection rather than ex
post facto compensation" (WE 162).
1
2
Page 2.
Pages 724 and 725.
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IX.
The position of non-UK policyholders
As mentioned above, there are several thousand victims who had purchased policies outside
the UK. A significant number bought with-profits policies through Equitable Life's branches,
which it had established under the provisions of the Third Life Directives in Ireland and
Germany.
1.
Equitable Life's business in Ireland and Germany
According to information received from the German financial regulator, ELAS sold policies
from its German branch between 22 December 1992 and 30 September 2001 (WE 211). The
Irish financial regulator indicated that that Equitable Life operated a branch in Ireland from
1991 to 2001 (Ms O'DEA, H4). Exchange of correspondence between Irish and British
regulators however suggests that the Irish branch formally closed on 8 July 2002.
Mr THOMSON (H2) claimed that no new contracts were sold in Ireland after 8 December
2000. Ms O'DEA (H4) confirmed that the Irish branch of Equitable Life closed to new
business in 2000, at the same time as the head office in the UK did. "The company has not
sold any new policies since then" (MS O'DEA, H4). Equitable Life is continuing to service its
remaining Irish and German clients on a cross-border basis under the provisions of the Third
Life Directive from its UK office (WE 612 and WE 853). All policies sold by ELAS through
its branches in Ireland and Germany were non-GAR policies (Mr WEYER, H3; Ms KNOWD,
H2; WE 21). The magnitude of the financial damage suffered due to the crisis by non-UK
policyholders as a whole cannot be assessed on the basis of the available information.
2.
Grievances of non-UK policyholders
The committee has received numerous letters from German and Irish policyholders, with
information about the circumstances under which they acquired policies, their correspondence
with ELAS and the financial authorities, losses they have suffered and actions they have taken
in order to obtain redress. One Irish policyholder (Ms KNOWD, H2) and a representative of a
German policyholders' action group (Mr WEYER, H3) furthermore gave oral evidence before
the committee. Moreover, on 6 October 2006, a committee delegation visited Dublin and met
with aggrieved Irish policyholders. Following this visit, a questionnaire was sent by the
committee to the participants with detailed questions, in particular concerning the avenues
they pursued in trying to obtain redress. 30 Irish policyholders returned the questionnaire
completed, some of them enclosing copies of documents and of their correspondence with
ELAS, financial authorities and ombudsman schemes (WE-FILE 33).
1
Page 1.
Page 1.
3 Page 8.
2
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a.) Motivations for investing with ELAS
Many policyholders emphasised that, when they decided to invest in an Equitable Life withprofits policy, they relied on the long-standing reputation of Equitable Life as the oldest UK
mutual life insurer. Some also alluded to the Society's excellent credit rating (see for instance
WE-FILE 15, WE-FILE 33), such as emphasised in Equitable's sales material (see annex to
WE-FILE 15). Irish policyholders told the committee during the meeting in Dublin on 6
October 2006 that they were attracted to Equitable Life by the fact that they could purchase
policies directly from the Society's branch and thus avoid commission fees charged by
intermediaries for policies offered by ELAS competitors. In addition, international
policyholders pointed out that, when they invested, they were informed by ELAS that the
industry was properly supervised by regulators (see also Mr SEYMOUR in WE 36 and H7;
Mr DUGGAN in WE-FILE 14).
b.) ELAS advertising
International policyholders informed the committee that their decision to invest with
Equitable was also influenced by advertisements and sales-material from the Society, which
emphasised the "supreme performance" of the fund (see WE 531) or referred to the
"extraordinary figure" of 10.75% interim rate for bringing values forward during 2000 (WEFILE 12 and WE-FILE 15). Equitable sales material submitted to the committee also alluded
to "smoothing of fluctuations" (WE-FILE 13; WE 53): Mr SEYMOUR (H7) referred to "a
document, [which] stated the method of management that ELAS provided something of a
smoothing fund based on the build up of reserves... ELAS claimed it was running its pension
fund as a smoothing fund by holding reserves." Finally, policyholders said that Equitable's
sales material made them believe their investment was absolutely safe. The ELAS
advertisement of 2000 annexed to WE-FILE 12 states the following: "With the Equitable you
are putting nothing at risk".
ELAS advertising was also subject to criticism in Germany. Mr WEYER indicates in WE 852
that "in early 2000 ELAS started an aggressive campaign to attract more German clients and
launched adverts referring to achieved interest rates of 13% for 1999". In H3 he claimed that
Equitable Life's sales adverts implicitly suggested to potential German policy buyers that they
were buying a policy subject to prudential scrutiny of the German regulatory authorities,
which was not the case. Copies of EL advertisements published in German newspapers3 were
submitted. Questioned on this subject, Mr. STEFFEN, representative of BaFin, reported in H6
that Equitable Life Germany stopped the advertisement campaign but that it did so only after
it had received several letters from BAV, the German financial regulator at the time, who
considered the advertisements to be misleading since the terms used would make German
customers expect that the returns mentioned were guaranteed (see also WE 854). A copy of
this exchange of correspondence has been submitted to the committee by BaFin (WE-CONF
1
C-1.
Page 8.
3 "Buy German, earn British. High returns consistent with a high degree of security - the ideal savings strategy for German
investors first had to be devised" and "13% returns: ask your insurer why they only give you half" full-page advertisements in
"Die Welt am Sonntag", weekly newspaper, and "Frankfurter Allgemeine Zeitung", daily, in February 2000.
4 Page 8.
2
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17).
c.) Allegations of mis-selling
Like many UK victims, most Irish policyholders claim that when they decided to invest with
Equitable, they were not properly informed about the GAR-related risks associated with their
policies (see in particular WE-FILE 33 and other pieces of written evidence)1. By way of
example, Irish policyholder Mr. O'FARRELL (WE-FILE 9) recalls how "I was never
informed of the potential GAR liability looming over the fund and the possible consequences
to my pensions funds having to partly finance that liability." Mr TROY (WE-FILE 4)
considers he was mis-sold his policy in December 1999 as "the company had major
difficulties with its liabilities to pension funds in the UK ... and I was not made aware or privy
to this." One Irish policyholder told the committee during its delegation visit to Ireland, that
he was sold his with-profits policy only a few days before the Hyman judgement.
However, the mis-selling allegations made by international (in particular Irish) policyholders,
go beyond the mere failure of the society to disclose the potential GAR-liability to
prospective customers in general terms. During its meeting with Irish policyholders in Dublin
on 6 October 2006, many of the policyholders referred to misleading information they claim
to have received from ELAS to the effect that they would be buying into a separate Irish fund,
which would be ring-fenced from the UK fund and therefore not affected by any liabilities
within the UK fund. This was later confirmed by some of those Irish policyholders who
responded to the questionnaire which had been sent to them by the committee (WE-FILE 33).
Mr. Seamus POWER, a former ELAS sales representative in Ireland (WE-FILE 2), said that
he "heard about the GAR issue through the Sunday Times in late 1998. By then there were
about 12 sales people and none of us had ever heard about the guaranteed annuities, as they
were never sold in Ireland. We asked the management about the situation and were told it was
nothing to do with us and to get on with the sales." Hearing about the Court case coming up in
July 1999, he was told that "[this did not have] anything to do with the International Branch
as [GAR] policies were never sold here and our funds were 'ring-fenced'. After the lost appeal
case "we were told to keep selling as we were 'ring-fenced' and would not be affected by the
outcome even in the worst case. ... We continued to sell and more sales staff were recruited
during this time. ... Then the penalties were introduced and locked many policyholders into
the position of either taking a 10% reduction in policy value or staying invested. It appears
that the management of EL knew there were significant problems within the Society in 1998
and I think all policies sold after this date should be void." Ms KNOWD submitted a copy of
a newspaper article in the Irish Independent of 15 March 2000, which supports this allegation.
The article apparently reports from a press conference by Equitable Life held in Dublin and
states the following: "The Equitable executives ... played down the impact of a recent Court of
Appeal ruling. ... This has no impact on Irish policyholders who are 'ring-fenced' from their
UK counterparts" (annex to WE-CONF 28).
Mr. SEYMOUR, a policyholder who purchased his policy in Belgium, informed the
committee in H7 that "ELAS sales personnel approached potential customers throughout the
Community stating ... these policies were called 'international' policies and were separately
1
See also WE 3, WE-FILE 2, WE-FILE 4, WE-FILE 9, WE-FILE 11, WE-FILE 13, WE-FILE 14, WE-FILE 15.
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administered by a branch office outside the UK. ... At the point of sale the company had
assured potential purchasers that the 'international' policies were separate from the UK withprofit fund". When problems at Equitable Life were being widely reported in the press (late
1999), Equitable wrote to all 'international' policyholders in January 20001 "reassuring them
that their polices were indeed separate and would be unaffected by any court ruling on the
company’s UK funds. It was only subsequent to the Court case that the company admitted that
this was not true. On 14 August 2000, ELAS wrote to say that as a result of the loss of the
Court case with profit bonuses would be reduced for 'all' types of policyholders and that the
society was up for sale."
In relation to the above, Mr THOMSON stated that "I am aware of allegations put forward by
Irish policyholders claiming that they were falsely informed by Equitable Life that they
bought or would be buying into a separate Irish fund which would be ring-fenced, and thus
not affected by liabilities arising within the UK fund" (H8). In response, he told the committee
the following (H8): "The printed material I have seen is quite clear that there was an
ambition that at some future date the Irish fund or the German fund might be independent.
However, clearly, they were not independent funds. They did not have their own start-up
capital; that was provided by the main with-profits fund. The degree to which they were
separate was in terms of having assets in those countries in that currency and that meant that
the investment performance diverged. It is not uncommon in a UK with-profits fund to have
quite separate bonus series for different contract types, and they will then get different
investment performance fed through to that individual bonus series. However, if there are
problems that beset the entire fund, then it will affect all of those components. That was the
position of the Irish policyholders in terms of the physical literature that I have seen. That is
not to say that individual comments were not made that implied something different, but that
was the official position". Mr THOMSON promised, however "to do what I can to find ...out"
(H8) why Irish salesmen appear to have been given misleading information and passed it on
to prospective policyholders. Later he confirmed in WE-CONF 21 that "I am not aware of
anything in the product literature which states that Irish investments would somehow be kept
separate from the rest of the with profits fund". The Irish regulator notes that "since the
commencement of our investigation into the Equitable Life matter at the request of the then
Tánaiste, no evidence has been presented to support the allegations that Equitable Life were
representing that an Irish ‘ring-fenced’ fund existed" (WE 80).
Mr SCHÄFER, a German policyholder claims in WE 10 that policyholders without
guaranteed interest rates (GIRs) would be disadvantaged compared to those with GIRs. GIR
policies were sold by ELAS up until 1996. He believes that the existence of policies with
GIRs has had an adverse impact on the performance of non-GIR policies. He thus considers
that non-GIR policyholders have "cross-subsidised GIR policyholders". Mr SCHÄFER
compares the problem with that of GAR-liabilities and believes that non-GIR policyholders
have a strong case for mis-selling. In this respect, he referred in particular to a study carried
out by the UK Pensions Institute (WE 29), which appears to corroborate his views. The
committee asked Mr THOMSON whether the allegations were true but only received an
evasive answer (H82). Since this problem is not, however, specific to German or other non1
Copy of the letter submitted to the Committee.
"I was asked if the existence of policies with guaranteed interest rates – GIRs – sold by Equitable Life until 1996 had an
impact on the performance of policies without such guaranteed rates; also whether non-GIR policyholders were informed of
the possible impact of GIR policies on their investment when they purchased their policies. The Society has a single with2
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UK policyholders, it is not further explored at this point.
d.) Allegations of discriminatory treatment
Some policyholders alluded to supposedly discriminatory treatment by Equitable Life of nonUK policyholders. In WE-CONF 19, for instance, a view is expressed that policyholders in
Ireland and Germany were discriminated against by the sheer fact that non of them was
entitled to the guaranteed annuity rate (because ELAS had stopped offering such policies
before the two branches were opened). In relation to this it is alleged that ELAS "started its
operations in both countries when (according to the Penrose report) the Equitable was
possibly at its weakest" (WE-CONF 19). Another witness referred to the launch of a
'European fund' in Ireland in the year 2000: "This fund had been available in the UK since
1987. Equitable had been trading in Ireland since November 1991 but apparently had never
found it appropriate to launch this product on the Irish market until March 2000, just four
months before the bubble burst. ... The timing of the launch indicates clearly that the Society
was intent on extracting the maximum amount of money from the Irish market and did not
[care] about the consequences for Irish people" (WE-CONF 28).
Secondly, Irish policyholder Ms KNOWD (H2) complained about different bonuses awarded
to Irish and UK policyholders, respectively. As outlined above under point c.), Mr
THOMSON explained in both H2 and H8 that there was a separation between ELAS' Irish
business, German business and UK business in terms of different series of bonus and
notionally earmarked different investments. According to ELAS, "bonus rates have differed
between UK and Irish policies from time to time due to the different performance of assets
hypothecated to the notional Irish fund" (WE-CONF 5). Ms KNOWD (H2)1 claimed
furthermore that higher "penalties" were "imposed" on Irish policyholders: "In April 2003, the
financial adjustment in Ireland was 13.6% and for UK policyholders 11%. The maturity
adjustment was 15% in Ireland and 9% in the UK." In this context, ELAS points out in WECONF 5 that in July 2001, when UK with-profits pension policies were reduced by 16%, Irish
policy values were not reduced.
e.) ELAS information policy
Ms KNOWD (H2) furthermore complained about ELAS' allegedly discriminatory practices in
terms of providing information to policyholders. She claims that "information specific to Irish
policyholders is not contained in the annual report and accounts", that she "did not get
notification of the AGM" and that she was thus "deprived of her voting rights".
Mr WEYER (H3) criticised the Society's information policy vis-à-vis German policyholders:
"German policyholders ... suffer from the information policy of the Society... Texts sent out –
allegedly for information – are usually very long and to some extent completely unintelligible
profits fund and it is managed as a whole, allowing for all of the guarantees on all of the different types of policy. I can
confirm that all guarantees have been met. Further, the terminal bonus, when it is allocated, allows for the GIRs in GIR
contracts" (Mr THOMSON, H8).
1
See also WE-CONF 1 and WE-CONF 13.
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to the consumer. An example of this is the ‘proposal for a compromise settlement’, sent out in
great haste, the so-called GAR compromise plan. It alone comprised 227 pages. The
document has a very cumbersome and impenetrable structure which is of little help to the
German policyholder because the document, which sets out to settle the rights and obligations
of the contracting parties in the long term, refers to English law and, in particular, to Section
425 of the Companies Act of 1985. German policyholders cannot make much sense of this,
particularly as, when contracts were concluded and according to a layman’s reading of the
policies, only German law was supposed to be applicable. A particularly critical point is the
information policy in relation to the quantification of surrender values, in so far as the
contract allows surrender, and information on the exact composition of the profit-sharing
arrangement. Here the current policy of the Society from the point of view of German
policyholders could be described in practice as no information at all, apart from a bare
figure."
Mr WEYER (H3) also referred to linguistic problems caused by the Society's refusal to
provide certain documents in German: "The German policyholders were contacted by letter of
12 April 2006 enclosing the voting documents, the annual report and the candidates’
declarations only in English stating the following reasons: ‘we are only sending the
documents in English this year in order to avoid delays due to translation and separate
printing. The use of English documents will also save expense’. I think it is clear that many of
the German policyholders were very annoyed by this procedure and felt they were in a quite
helpless situation because the great majority of policyholders, as we learned, could not make
any use of the English documents." Mr SEYMOUR, who is a director of the Equitable
Members Action Group (EMAG) with main responsibility for non-UK based policyholders,
informed the committee that he too received letters from German policyholders who
complained of a lack of financial reports in their language. In WE 21-CONF it is confirmed
that documents relating to the Annual General Meeting as well as reports and accounts are
now issued in English "as the translations of documents was causing some delay". When
asked whether he believes that such practice is in accordance with the Third Life Directive Mr
THOMSON responded in H8 that "as I understand it, it does not breach our requirements".
He stressed furthermore that "where statements need to be provided in the appropriate
language, then we comply with the requirements" (H8). "All policy related correspondence
including annual statements, servicing enquiries and complaints are dealt with in German"
(WE-CONF 21). The requirement to communicate information to the policyholder in the
language of the Member State of the commitment, laid down in Annex III of the consolidated
Life Directive (see point 3. a.) below), indeed relates only to the information listed in the
Annex, which does not include the documentation referred to by Mr WEYER and Mr
SEYMOUR.
Written and oral evidence received by the committee from Irish and German policyholders
suggests that they have faced particular difficulties in their efforts to obtain redress.
3.
Access to redress in the Member State of commitment
Since most of the aggrieved non-UK policyholders first turned to their respective national
authorities, this section begins by briefly outlining the responsibilities of host Member States
in terms of consumer protection as laid down in the Third Life Directive. Subsequently, the
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roles played, and actions undertaken, by Irish and German regulatory authorities in relation to
Equitable Life are explored with particular reference to providing assistance to aggrieved
policyholders. Finally, the question whether or not non-UK policyholders have (or had)
access to redress through Ombudsman schemes or guarantee funds in their respective home
countries is addressed.
a.) Supervisory authorities in the Member State of commitment
Role and powers of host Member State authorities under the 3rd Life Directive (3LD)
In WE 41, the Commission outlines the division of powers and responsibilities between
authorities of home and host Member States under the 3LD. Thus, according to Article 10(2)
of the Directive, "the financial supervision of an insurance undertaking, including that of the
business it carries on either through branches or under the freedom to provide services shall
be the sole responsibility of the home Member Sates."
On the other hand, the host Member State retains powers for supervising the conduct of
business on its territory. Firstly, Article 32 of the 3LD lays down the basic rule that the law
applicable to Life assurance contracts must, in general, be that of the country of commitment,
i.e. the country where the policyholder has his/her habitual residence in order to ensure that
the contract is governed by law with which the policyholder is familiar.
Furthermore, "when a Community insurer establishes a branch in, or provides services into,
another Member State, that host Member State may require that its conduct of business rules
that are justified by the general good should be respected. These rules must be notified to the
competent authorities of the insurer's home State (see Article 40(4)), so that the home
authority can inform the insurer accordingly. In addition the host Member State may ask for
ex post and non-systematic notification of the policy conditions used by an insurer in its
territory 'for the purpose of verifying compliance with national provisions concerning
assurance contracts' (Article 45)" (WE 411).
The Commission provides guidance on the application of the concept of the general good in
the insurance sector through an interpretative Communication2. The right of home Member
States to apply their rules in the interest of the general good is referred to in several places in
the 3LD, for instance as regards advertising, where it is stipulated in Article 47 that "insurers
can advertise their products in the host country subject to any rules governing the form and
content of such advertising adopted in the interest of the general good".
The 3LD also lays down requirements in terms of minimum information that must be
provided to the policyholder before the contract is concluded and throughout the term of the
contract (see Article 36 in connection with Annex III). The information includes inter alia the
arrangements for handling complaints. According to Article 36(3), information in addition to
that listed in Annex III may be required by the host Member State if it is necessary for a
1
Page 3.
Commission Interpretative Communication on the freedom to provide services and the general good in the insurance sector
(2000/C 43/03).
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proper understanding of the essential elements of the contract. The implementation of the
requirements laid down in Article 36 in connection with Annex III of Directive therefore falls
within the competence and responsibility of the Member State of the commitment. "The law
of the country of the branch will thus dictate the content and form of the information to be
provided to customers of the branch and would be used to assess any allegation of misselling" (Mr TERTÀK, H1).
Annex III stipulates that the information must be provided in writing and (normally) in an
official language of the Member State where the policyholder has his/her residence. In H7
Mr BEVERLY from the Commission specified that there are "very detailed provisions in the
directive about the information that must be provided to policyholders in their own
language". "This is precisely the role of the host Member State – to make sure that its general
good rules are being enforced. This, I would argue, is a joint responsibility of the home and
the host to make sure that the business is being carried on properly. But certainly, the
policyholder is entitled to information in his own language, in accordance with the terms of
the directive" (Mr BEVERLY, H7).
The Commission emphasises, that while the "host Member State can require that certain of its
rules be respected, ... the home Member State ... is ultimately responsible for ensuring
compliance by the insurer with the provisions relating to the general good existing in the
various host Member States in which it carries on its business (see Articles 13(3)(b) and
46(3))" (WE 411).
When the host Member State establishes that an insurance undertaking is not complying with
the legal provisions applicable, it should first call on the undertaking to correct its behaviour.
If this fails, it must contact the home authority to seek a solution. "However, in emergency
situations, the host State may without prior consultation of the home State authorities, take all
necessary measures to prevent or penalise infringements, including prohibiting the
undertaking in question from concluding new contracts within its territory" (WE 412).
As regards responsibility for dealing with complaints by policyholders, the Commission states
the following: "Given the important role given to the Member State of the commitment in the
management of policyholder information, including information on the arrangements for
handling complaints, and given the right accorded to the host State to require the application
of its conduct of business rules justified by the general good, the Commission considers that
the Member State of the commitment is obliged to assume a certain responsibility for the
reception and processing of complaints and the guidance of complainants. If the complaint
relates to a matter (financial supervision) which is clearly the responsibility of the home State
authority, it can easily be passed on to that authority" (WE 413). In WE-CONF 184 the view
is taken that the country of commitment "always had a role to play in advising its citizens, not
least given the problem of language" and because "consumers naturally look to their local
authority to advise them".
Given this split of responsibilities, the Commission emphasises the importance of good
1
Pages 4 and 5.
Page 5.
3 Page 5.
4 Page 8.
2
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exchange of information and effective cooperation between the supervisory authorities of host
and home Member State, respectively. This is reflected by the adoption of the 'Siena Protocol'
(WE 55) in 1997 by supervisory authorities of EU Member States. The protocol determines
rules of behaviour with regard to exchange of information and cooperation between
supervisory authorities in the application of Insurance Directives. The Commission
acknowledges, however, in its White Paper on Financial Services Policy 2005-20101 the need
define the roles and responsibilities of home/host supervisors in greater clarity.
Irish financial regulators
In Ireland, the competent authority during the time ELAS operated a branch was the
Department of Enterprise, Trade and Employment (DETE) before the Irish Financial Services
Regulatory Authority (IFSRA) was established in May 2003. The present Irish Minister for
Enterprise, Trade and Employment informed the committee through the Irish Permanent
Representation to the EU that "responsibility for prudential supervision of the insurance
sector and the services provided (including legacy issues) moved in its totality from the
Department and Minister for Enterprise Trade and Employment to the Irish Financial
Services Regulatory Authority (IFSRA/Central Bank), now known as the Financial Regulator
in 2003" He stated furthermore that "actions taken by his Ministry in the insurance sector
(including in relation to Equitable Life) before responsibility moved to the Financial
Regulator should be construed as actions of the Financial Regulator", who would
furthermore be in possession of all relevant records (see WE 64).
Ms O'DEA, however, claims in WE 65 and WE 80 that IFSRA is "responsible only for
actions taken by it since 1 May 2003". During the meeting with the committee delegation in
Dublin on 6 October Ms O'Dea specified that IFSRA would only be responsible for
'continuing actions' such as for instance authorisations granted prior to 2003. Since all actions
of the Financial Regulator in relation to ELAS have been 'completed' because ELAS closed
the Irish branch prior to the establishment of IFSRA, the latter could not be held responsible
or accountable for them. "However we are in possession of the records relating to Equitable
Life in the period prior to 2003" (WE 65). The committee subsequently asked IFSRA in
writing, which is the authority, if not IFSRA, that is responsible and accountable for those
actions of the Irish regulator in relation to ELAS which were 'completed' before the
establishment of IFSRA. IFSRA failed to reply.2 Thus it appears that no Irish authority
assumes responsibility for actions undertaken by the Irish regulator in relation to ELAS before
2003.
With regard to the regulation of Equitable Life in Ireland, Ms O'DEA emphasised both in H4
and in WE 61 the UK authorities' responsibility for financial and prudential supervision of the
Irish branch according to the 3LD. In terms of conduct of business regulation she stated the
following: "At the time, from an examination of the files that were passed to us, it appears
that the only rules that were imposed were the ‘general good’ rules set out in the directive.
Member States were free to apply additional conduct of business rules as, for example, the
UK did. Ireland did not apply additional conduct of business rules at that time, but I think the
1
2
no COM number available.
See correspondence between the Committee of Inquiry and IFSRA in WE 80.
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word ‘obliged’ was used there. There was no obligation on Ireland, or on any other EU
Member State, to do that and I think the UK probably would have been particularly unusual
at the time" (H4).
The committee sought to obtain further information from IFSRA as to whether at all any Irish
conduct of business rules at all were applicable at the time, for instance in relation to misselling, and received the following response (WE 80): "Statutory Instrument 360 of 1994 ...
provide[s] that insurers are required to comply with specified legislation, including the
Consumer Information Act of 1978, the Sale of Goods and Supply of Services Act 1980 and
consumer credit legislation adopted by the State. These requirements were and are
enforceable through the Courts...". From WE-CONF 9 it appears that the British regulator
was never notified of these rules. After the main events at Equitable, namely on 1 February
2001, conduct of business rules specific to the life insurance were imposed in Ireland through
the Life Insurance Provision of Information Regulations 2001. According to the notification
papers sent to the British regulator on 29 July 2002 (i.e. after the closure of ELAS Irish
branch on 8 July 2002), they provide for "disclosure of information at point of sale to
individual purchasers of life assurance" (WE-CONF 9). Ms O'DEA informed the committee
that the position of Irish consumers has been further improved since through the recent
introduction of Consumer Protection Code (replacing an interim Code of Conduct for
Insurance Undertakings set up in 2003) that lays down, among other things detailed
requirements as to the amount and type of information to be provided to consumers (see H4
and WE 61). IFSRA added in H4 that it is "developing administrative sanctions procedures
which will allow us to impose sanctions on a firm which has committed a serious breach of
the code".
During the meeting on 6 October 2006 in Dublin, the committee delegation also sought
information from ISFRA as to the whether the Irish Financial Regulator had been in contact
with their UK counterparts concerning Equitable Life's situation and possible implications for
Irish policyholders during the critical period between 1998 and 2000 and requested copies of
relevant correspondence between Irish and UK regulators. Ms O'Dea said that one "may
assume that there has been such correspondence" but claimed that IFSRA would not be
allowed to disclose it, because it would contain information that is to be regarded as
confidential under the EU Life Directive. The committee maintained its request in a
subsequent letter to IFSRA. IFSRA replied, stating that "we will now conduct a review of the
information contained on the files in our possession with a view to identifying any suitable
correspondence relating to the period specified in your letter; permission must then be
obtained from the UK authorities and Equitable Life prior to any disclosure" (see WE 80).
Written evidence received by the committee1 suggests that some Irish policyholders turned to
IFSRA for redress. This is confirmed by Ms O'DEA in WE 80: "No complaints were received
at that time [by IFSRA's predecessor]. However, in the period since our establishment, we
have received a number of complaints after it became widely known that we were reviewing
the matter." Ms O'DEA did not specify how many complaints were received and which
grievances these concerned. However, according to Ms O'DEA, the Irish regulator generally
does not have the power to adjudicate on consumer complaints against a financial firm nor to
award compensation to customers, since these powers have been vested in the Irish Financial
1
See for instance WE 3.
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Services Ombudsman (see below). The Irish regulator indicated that it has nevertheless sought
to assist Irish policyholders. Firstly, Ms O'DEA indicated that IFSRA referred complainants
to the voluntary Insurance Ombudsman of Ireland Scheme. Furthermore, at the request of the
then Irish Minister for Enterprise Trade and Employment, IFSRA "undertook a review of
matters raised by Irish policyholders in order to identify how their position could be
improved" (Ms O'DEA, H4). The review did not identify any means of improving the
situation of Irish policyholders.
Mr TREACY (H4) stated that "we have tried essentially to provide as much information as
we could: we made representations on policyholders' behalf and sought information from the
various compensation schemes, the Society itself and the UK regulator and we passed on that
information, where it was possible, to the policyholders both individually and by placing it on
our website" (Mr TREACY, H4). He concluded that "our role ... has ... been limited to the
provision of information and assistance in making contacts". In this respect, the cooperation
received from the UK authorities was good, according to Ms O'DEA (H4). Summarising,
Ms O'DEA (H4) stressed that ISFRA "has made every effort ..., within the limits of [its]
powers, to assist ... consumers affected in Ireland". Many Irish policyholders, however,
regarded the level of assistance provided by their national financial regulator as unsatisfactory
(see in particular the completed questionnaires with annexes in WE-FILE 33 as well as Mr
TROY, WE-FILE 4; Mr DUGGAN WE-FILE 14; Ms KNOWD, H2).
German financial regulators
In Germany, the 'Bundesanstalt für Finanzdienstleistungsaufsicht' (BaFin) took over
responsibility from the 'Bundesaufsichtsamt für das Versicherungswesen' (BAV) in May
2002. Like the Irish regulators, Mr STEFFEN from BaFin stressed in H6 that financial
supervision, including that of business carried on through branches, is the sole responsibility
of the home Member State.
With regard to the regulation of Equitable's conduct of business in Germany, Mr STEFFEN
from BaFin (H6) said that in 1992, when the Equitable Life branch was licensed, BaFin's
predecessor BAV sent out documents to ELAS, which "included stipulations and rules, which
have to be observed in Germany". "They deal in particular with such questions as may have
an effect on consumers." As examples, he stated "model calculations showing how surpluses
must be calculated" and "what advertising campaigns were allowed in Germany".
Furthermore, Mr WEYER in WE 851 indicates that BaFin's predecessor BAV in 1996 and
2000 communicated to EC insurance undertakings active on the German market under the
Third Life Directive (including Equitable Life) a list of regulations that had to be complied
with by these undertakings. "They ... [issued] requirements for German rules on conduct of
business to be followed by ELAS German branch business in 1996 and 2000" (WE 852). The
committee has not received detailed information as to the applicable requirements in terms of
information disclosure.
In connection with advertising, Mr STEFFEN referred to an intervention by BaFin in
1
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response to an advertisement by ELAS, which appeared in German newspapers in 2000,
promising 13% return to prospective policyholders: "We ... discussed the matter with the
Society, challenging and criticising the advert, and the Society gave us an assurance that it
would immediately withdraw the advertising campaign. The main reason for our intervention
was that we believed, and still believe, that the promise of a 13% return in the year 2000 was
misleading and that the term ‘return’ gave the impression that it was guaranteed. ... We
therefore thought that this advertising was misleading and for that reason we put an end to
it." When asked whether the German regulator informed the FSA of the incident,
Mr STEFFEN replied hat "I do not personally have any knowledge that the then authority
informed the FSA of the banning of this advertising campaign. ... It was not possible to get
complete clarification of this question in the talks with my colleagues".
BaFin provided copies of letters, which BAV had sent to ELAS' German branch concerning
the controversial advertisement (see WE-CONF 17). In its first letter dated 12 April 2000,
BAV asks for general explanations with regard to the promise of a 13% return. On 29 May
2000 BAV sent another letter, stating that the explanations given by ELAS had not been
satisfactory and asking for proof that the 13% return was in fact guaranteed. On 31 July 2000,
at a time when the House of Lords had already handed down its judgement in the Hyman
case, the issue was still pending and BAV sent another letter asking ELAS for clarification as
to which elements of the promised return were guaranteed. The last letter by BAV dated 10
October 2000 responds to a letter by ELAS of 21 September 2000, in which the latter
announced that it had withdrawn the advertisement containing the reference to 13%. BAV
took note that the said advertisement had been withdrawn but at the same time criticised a
new advertisement, which the Society had apparently published on 21 September 2000 in the
"Frankfurter Allgemeine Zeitung": Firstly, BAV noted that the suggestion by ELAS that it
was solely regulated by the British supervisory authorities was misleading. Secondly, BAV
considered that, the reference in the new advertisements to previous average growth of the
with-profits fund would create a false sense of security among potential clients and raise
expectations that the Society would not be able to meet given its 'current financial situation'. It
therefore ordered ELAS to withdraw the advertisement concerned and to stop any equivalent
advertising. Mr SCHNEITER, whilst giving evidence to the committee on behalf of the Swiss
regulator stated that a company regulated in Switzerland "would never publish an advert such
as appeared in the Frankfurter Allgemeine Zeitung because he would know very well that
such products are not even allowed in Switzerland. There has not been any such advertising".1
Mr STEFFEN informed the committee in H6 that the German regulator first learned about
Equitable Life's financial difficulties from press articles. "After we had learned of the
situation, the then German regulator promptly asked the British regulator, the FSA, for
details in order to gain specific information on Equitable Life’s situation. In the
correspondence, which we have found in our records, the FSA made it clear that German
customers would be treated in exactly the same way as all other customers here, that is to say
there was a reduction in with-profits entitlements. There is some correspondence regarding
these discussions between the German supervisory authority and the FSA in our files, and I
assume ... that there were accompanying talks [which] were conducted at a high level and
that the German regulator received all the necessary information from the FSA at that time"
(H6). Mr STEFFEN said in H6 that he cannot make the correspondence available to the
1
Hearing of 13 September 2006, at page 16 of the transcript.
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committee because "our British colleagues ... made it clear that these confidential documents
might not be passed on". Later on, however BaFin (see WE-CONF 17) and FSA (see WECONF 9) provided copies of letters exchanged between BAV and the FSA. The first exchange
during July and August 2000 concerned the implications of the judgement by the House of
Lords, while the second during December 2000 and January 2001 referred to the failure of the
Society to find a buyer.
According to Mr STEFFEN (H6), Article 17 of the German Constitution Law gives every
citizen the right to petition authorities and obliges the authorities to respond. BaFin indicates
in its written statement to the committee (WE 211) that it has received 65 queries and
complaints concerning Equitable Life from German policyholders since 2000. It refused to
deal with most of them as they predominantly concerned questions of financial supervision,
which do not fall within its competence. BaFin would only investigate complaints that allege
contraventions of German civil law. Only fourteen of these complaints concerned legal
supervision, that is supervision of compliance with German legal provisions. "Of these
fourteen complaints, twelve were considered by our staff at the time to be unjustified and two
to be justified. In other words, our current understanding is – and I assume that was also the
understanding at the time – that Equitable Life has not broken any German laws, at least we
have no knowledge of any such matters" (Mr STEFFEN, H6). The two complaints it upheld
did not concern issues, which were directly related to Equitable Life's crisis.
BaFin did not indicate to the committee whether it has received complaints that allege misselling on the grounds that policyholders were not informed by the Society of the GAR risk
and whether or not such complaints would have been investigated. One policyholder,
Mr SCHÄFER, informed the committee in WE 10 that he complained to BaFin, alleging that
he was mis-sold his pension as he was not made aware by Equitable Life that his investment
would be in a common pool with Guaranteed Interest Rate (GIR) policies. He argues that the
latter have negatively affected his investment. From his correspondence with the German
authorities (WE-CONF 1 and WE-CONF 10) it appears that BaFin refused to deal with the
complaint, arguing that his complaint would concern 'financial supervision', for which the UK
regulator would be responsible and referred him to the FSA. The FSA in turn told him to take
the case to the German regulator, because "the host State regulator is responsible for financial
advice given in Germany and should be able to adjudicate on whether you have a valid
complaint" (see WE-FILE 18).
Mr STEFFEN explained in H6 that when BaFin receives German complaints which
essentially fall within the remit of the FSA, it informs the German customer on the
competence of the FSA and also tells him where he (or she) can make his (or her)
representation. Mr WEYER (H4) said that, as far as complaints clearly concern questions of
prudential supervision, the German regulator's stance on the issue was in compliance with the
provisions of the Third Life Directive: "BaFin strictly speaking does exactly the maximum it
can do within the framework of the directives. If BaFin were to go beyond that ..., it might be
feared that friction could arise between the Federal Republic of Germany and the United
Kingdom on this matter." He added that he has gained the general impression from informal
contacts with staff of the German regulatory authority that "the German regulator is very
wary of even approaching Equitable Life related questions because they are afraid that it
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might give rise to conflicts of competence with the UK Government" (H4).
BaFin stated in H6 that given its lack of competence in terms of financial supervision, it "at
least wanted to help customers who lost money to obtain compensation". "On this point, we
made strenuous efforts to find out whether compensation from a protection scheme was
possible for German customers. You will no doubt understand that we could not verify this
easily because we are talking about a British protection scheme here and hence about British
rules for such a scheme. We nevertheless checked to see whether any claims were possible,
and we would have passed on any such information to the German customers"
(Mr STEFFEN, H6).
Financial regulators in other Member States
Mr SEYMOUR told the committee in H7 about similar experiences made by policyholders
resident in other Member States, who contacted their respective national regulators: "I have
received letters from people in Spain, France and Germany complaining about suffering due
to losses. I know that the Spanish policyholders had written to their regulator, who had
similarly replied that it was a UK issue. I know that was the reply in Belgium too, because I
wrote to the Belgian authorities myself." The Belgian authorities replied to him saying that "if
[he] felt there was anything which had been done in their territory against their law
regarding contract, then [he] would have to make a complaint to the police or to the 'juge
d’instruction'; but if it had anything to do with financial regulation, they made it clear that
they were not the authority responsible" (H7).
***
As the Commission pointed out in both WE 41 and WE-CONF 18, host state regulators do
have, outside the core prudential area, a considerable role according to the 3LD, in particular
as regards the rules governing the conduct of business on its territory. They also have a role in
assisting complainants and helping them to direct their complaints to the appropriate
destination. The Commission notes in WE-CONF 181 that "the impression was being created"
by some witnesses heard before the committee "that the host member State ... was a mere
bystander and had no real say or control over the insurance business being done in its
territory". Similarly, Mr. WESTPHAL in WS2 stated that "national supervision often plays a
too passive role in the monitoring and enforcement process" and that "unless a 'critical mass'
of complaints is reached, supervision will not get active in some Member States." In WEFILE 28 he specified that unless it receives at least 50 complaints BaFin would usually "[not]
consider possible action" (WE-FILE 282). Evidence indeed suggests that some host state
regulators have taken a rather passive attitude in the enforcement of conduct of business rules.
For instance, the Irish regulator at the time had not notified any conduct of business rules. In
these circumstances, the Commission sees a "danger that neither the home nor the host
supervisor would look at conduct of business rules because each thought that the other was
1
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enforcing its rules" (WE-CONF 181). In Germany relevant rules were in place and notified to
the UK authorities, but the German regulator became active only once in relation to an
advertising campaign by ELAS. The German regulator considered that Equitable Life did not
breach any German rules, although the allegations of mis-selling against ELAS' German
branch are in fact the same as the ones which were, in part, pursued successfully by
policyholders in the UK.
It also appears that the provisions on conduct of business in the Third Life Directive leave
room for doubt and uncertainty as the Commission has acknowledged in its Communication
on freedom to provide services and the general good in the insurance sector2: "In the course of
contacts with numerous economic agents the Commission has come to realise that uncertainty
surrounds the interpretation of the scope ... of the Insurance Directives. ... The situation in
which insurance companies find themselves is far from clear and they thus face considerable
uncertainty both as regards the arrangements applicable to them in the different Member
States and as regards the content of the products they wish to offer. The differences of
interpretation seriously undermine the workings of the machinery set up by the Third
Directives and are thus likely ... to restrict the free movement of insurance services in the
European Union." As Mr HOLMES points out in WE 843, the Commission's Communication
dwells on the difficulties faced by insurance companies, "but the potential for confusion on
the part of consumers is still more pronounced. In the event of a problem, consumers are
faced with the task of unpicking whether their complaint relates to financial supervision (and
is therefore within the province of the home State of the insurance undertaking) or some other
aspect of regulation, and if the latter, whether it is covered by the residual regulatory
competence reserved for the State of the branch or the state of the provision of services". An
internal paper of the Irish regulator entitled 'Report to the Equitable Life Assurance Society' 4
indicates that the provisions of the Third Life Directive gave rise to confusion even among
regulators at the time: "Responsibility for the supervision of the Irish branch of Equitable
would appear to have rested with the FSA. However, Equitable's website (on 12 August 2003)
included the following statement 'Please note that policies with Equitable International,
Equitable Germany and Equitable Ireland are not regulated by the FSA'. While this statement
refers to 'policies' rather than the branch itself, it is not clear how it can be said that the FSA
is not responsible for the regulation of Equitable Ireland given the fact that it is not a
separate legal entity and the provisions of the Directive ...".
As regards the treatment of policyholders' complaints, the Irish financial regulator indicated
that in general it did not have the power to adjudicate on them and therefore referred
complainants to the Insurance Ombudsman of Ireland. By contrast, the German regulator does
have such powers and received complaints about ELAS. However, most complaints
purportedly concerned matters of prudential supervision, and were therefore not dealt with by
the German regulator. Evidence shows that, where the matters complained about clearly fell
outside its remit, the German regulator advised complainants to contact the FSA, whereas the
Irish regulator generally referred complainants to the Irish Insurance Ombudsman. No
conclusive evidence could be obtained form the German regulator as to whether (clearly
1
Page 7.
Interpretative communication of the Commission concerning the freedom to provide services and the general good of the
insurance sector [Official Journal C 43 of 16.02.2000].
3 Page 25.
2
4
See document enclosed as Appendix G by Mr O'Broin to completed questionnaire (WE-FILE 33).
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conduct of business related) mis-selling complaints in connection with the GAR issue were
received and how these were treated. Given that the German regulator did not believe that
ELAS had breached any German conduct of business rules, it must be assumed that any such
complaints would have been rejected.
Commenting in general terms from the perspective of consumers, Mr WESTPHAL claimed
that "cross-border complaints are often rejected by the supervisory authority of the country of
the consumer" telling the complainant that "the home country supervisor of the provider
would be responsible" (WS2). In his view, the authority of the country of the consumer
should have a clear responsibility for dealing with complaints, irrespective of whether or not
the matters complained about fall under its supervisory responsibility, because the consumer
could not be expected to address regulatory authorities in another Member State and
(possibly) in a foreign language (see WE-FILE 281). Thus, if a complaint relates to prudential
supervision, the authority of the consumer's home country should take it up, bring it to the
attention of the prudential regulator and attempt to resolve it in cooperation with that
regulator, according to Mr WESTPHAL.
In addition, evidence received by the committee suggests that, in relation to Equitable Life,
there was at least one case where a complaint was interpreted by the German regulator as
concerning a financial supervision issue, while the UK regulator regarded the same complaint
as conduct of business related. The complainant was therefore referred forth and back
between home and host regulator. While the case mentioned indeed appears to concern a
conduct of business issue, it must be noted that there exists a "grey area between prudential
and conduct of business supervision" (WE-CONF 182) which seems to have allowed home
and host state authorities to shift responsibility for dealing with complaints on to one another.
Mr HOLMES puts it the following way (WE 843): "As regards the division of regulatory
competence, the evidence heard by the Committee of Inquiry reveals the difficulties for
consumers in determining what rules are applicable to their contracts, and which national
regulator is competent to hear their complaints. Given the uncertainties, there may be a risk
of regulatory 'ping-pong' in cross-border situations in which each national regulator attempts
to assign responsibility to the other; the division of competence works in theory but it is
unclear whether it operates effectively in practice".
Finally, it must be noted that both Irish and German regulators appear to have responded to
numerous queries and requests for information from policyholders. There is convincing
evidence indicating that they proactively sought to obtain information from the UK regulator
and passed it on to Irish and German policyholders.
In essence, however, international policyholders were not able to get redress for their
grievances through their respective national financial services authorities.
b.) Financial Ombudsman schemes
A number of policyholders tried to obtain redress through their respective national
1
Page 3.
Page 8.
3 Pages 27-28.
2
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Ombudsman schemes.
Ireland
As regards the situation in Ireland, Mr MEADE explains in WE 62 that the Office of
Financial Services Ombudsman (FSO) was established on a statutory basis under the Central
Bank and Financial Services Authority Act of 2004 and began operations on 1 April 2005.
The Financial Services Ombudsman is an independent officer with the power to investigate,
mediate and adjudicate on complaints about the conduct of ‘regulated financial services
providers’ involving the provision of a financial service, an offer to provide such a service or
a refusal or a failure to provide such a service. His jurisdiction is not restricted to financial
services providers authorised in Ireland. Thus, he may also investigate complaints “about
financial services providers whose business is subject to regulation by an authority that
performs functions in an EEA country that are comparable to the functions performed by the
Bank or the Regulatory Authority” (See ES 3). He would only consider complaints when the
complainant has availed of the internal complaints procedure of his provider before.
Complaints on matters which occurred six years before the complaint is made and matters
which were (or are) subject to legal proceedings before a court or tribunal cannot be
investigated. The Ombudsman has extensive powers. Among other things, he can direct the
financial services provider to “pay an amount of compensation to the complainant for any
loss, expense or inconvenience sustained by the complainant as a result of the conduct
complained of” (see ES 31). The amount of compensation he can award is limited to
€250,000. The FSO’s decisions are binding on both parties subject only to an appeal by either
the complainant or the financial service provider to the High Court.
Mr MEADE indicated in WE 63 that since its establishment, the statutory Financial Services
Ombudsman has received 7 complaints on Equitable Life. They concerned allegations of
“mis-selling and the fact that people were not properly informed” (WE 68). However, none of
these complaints was investigated since “they fell outside the six year rule and furthermore
they had been subject to the [compromise] scheme of arrangement” (WE 68).
The main events at Equitable Life took place before the establishment of the statutory scheme.
At that time, the voluntary Insurance Ombudsman of Ireland (IOI) scheme dealt with
complaints concerning insurance providers, which were members of the scheme, including
ELAS. Other requirements for a complaint to be investigated by the IOI are outlined in WE
68: “Any complaint to be considered by the former Insurance Ombudsman of Ireland Scheme
... would have to take account of the fact that the amount of compensation claimed should not
exceed a certain figure; the complainant had, beforehand, availed of the internal complaints
procedure of his provider, the matter was not the subject of legal proceedings before a court
and was not time barred”. It should be noted in this context that a number of Irish
policyholders claimed during the delegation meeting on 6 October 2006 in Dublin that the IOI
refused to deal with their complaint, stating that it 'would only cover Irish insurance providers
that were members of the scheme'. However, the policyholders were not able to substantiate
their statements by written evidence in response to a request by the committee and they rather
appear to have misperceived the reasons for the IOI to reject their complaint.
1
Page 86.
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Ms O’Dea (H4) said that the Department of Enterprise, Trade & Employment, financial
regulator at the time, referred complainants about Equitable Life to the IOI. According to WE
68, the IOI received a total of 79 complaints related to Equitable Life. The committee asked
Mr MEADE “on which basis the IOI determine[d] whether to treat a complaint (submitted by
Irish ELAS policyholders) itself or otherwise refer it to the FOS” He replied that “when a
complaint was received it was assessed as to whether it could be investigated by the
Insurance Ombudsman of Ireland Scheme (IOI) or whether it was appropriate for the FOS. ...
Where a complaint was more appropriate to the Financial Ombudsman Service of the UK, the
complainant was advised that he should contact that office and was given the necessary
details” (WE 68). Later, Mr MEADE specified that "where a policy was sold in the UK to a
policyholder, that was the responsibility of the Financial Ombudsman Service in the UK"
whereas "a complaint regarding a policy sold in Ireland ... was decided on by the IOI".
According to WE 68, of the 79 cases received “14 ... were referred either to the Financial
Ombudsman Service in the UK or to the Insurance Federation of Ireland”. However, Mr
MEADE pointed out that, once a complainant was advised to take the matter to the FOS, “it
was up to that organisation to deal with the complaint or not”. Mr MEADE stated that “it is
quite possible that some complainants were neither treated by the Irish, nor by the UK
Ombudsman, particularly if the complaint fell inside the Court Scheme of Arrangement”. He
stated furthermore that he is “not aware of compensation awards, if any, made in individual
cases by the [UK] FOS" (see WE 68).
Evidence submitted by Ms KNOWD in WE-CONF 28 and in H2 illustrates that there had
been some confusion among policyholders, ombudsmen and ELAS about whether the IOI and
FOS should deal with certain complaints. Ms KNOWD who indicates in WE 33 that she had
purchased her policy from ELAS Dublin branch claimed that her complaint to the Irish
Ombudsman was “rejected on the basis of being outside her jurisdiction” (H2). This contrasts
with Mr MEADE's statement above, who declared that the IOI would have dealt with
complaints about ELAS policies sold in Ireland. Furthermore, it appears that when the IOI
rejected her complaint it did not refer her to the FOS1. Nevertheless, Ms KNOWD decided to
ask ELAS for "a signing-off letter for the FOS" but was told in return by ELAS that "the UK
Ombudsman does not have jurisdiction to deal with Irish complainants". When she insisted,
ELAS appears to have issued the signing-off letter but continued to discourage her from
complaining to the FOS, this time stating "that the question of whether the FOS has
jurisdiction over Irish policies is far from clear, ... [is] complex and take[s] a considerable
time to resolve" (see WE-CONF 28). Eventually, after 18 months, her complaint was admitted
by the FOS (see below).
The remaining 65 cases were dealt with by the IOI. The complaints concerned a variety of
issues such as allegations of mis-selling, the application of market value adjustments, bonus
rates, settlement amounts and surrender values (see WE 63). Mr MEADE could not specify
how many of the complainants alleged that they were not informed about the existence of the
GAR-related risks when they bought their policies: "Our files do not contain detailed
analyses regarding the existence of GAR" (WE 68). Likewise, he stated that "as some of these
files are more than six years old they are no longer kept in line with the six year Companies
1
There is no indication in WE-FILE 33 (responses to questionnaire) that the IOI referred to the FOS any
complainant who had unsuccessfully complained to her.
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Act requirements, it would be difficult to quantify how many indicated that they were invested
in a ring-fenced Irish fund" (WE 68). Thus it is not clear how many of the 65 cases
considered by the IOI are of relevance in terms of the main mis-selling allegations referred to
under point IX 2 c.)
Mr MEADE provided statistics regarding the treatment of 86 complaints, (i.e. 7 complaints to
the Irish Financial Services Ombudsman plus 79 complaints to its predecessor): As outlined
above, 14 cases were "referred to other agencies". Of the remaining 72 cases, 13 were bound
by the compromise scheme of arrangement and 15 fell outside the terms of reference.
Furthermore, "7 cases regarding clarification arose and were not pursued further, and 4
other cases were not pursued because of a lack of information being supplied by the
complainant" (WE 68). Decisions were only issued on the remaining 33 cases, 15 of which
"in favour of the complainant" (WE 68), which represents 17% of all complaints submitted.
Again, Mr MEADE did not indicate, whether these cases concerned the main mis-selling
allegations referred to under point IX 2 c.), which were put forward by ELAS victims.
Of the 30 Irish policyholders who responded to the committee's questionnaire (see WE-FILE
33), only 7 indicate that they had made complaints to the IOI. 3 of them received small
settlements. One complaint was rejected because the policyholder was covered by the
compromise agreement. Another complaint was not admitted because the value of the claim
exceeded €160.0001. A third complainant had originally submitted a complaint to the UK
FOS who advised him that it cannot deal with his complaint since "the issue ... raised falls
within the jurisdiction of the Insurance Ombudsman of Ireland". The IOI however, also
refused to deal with the complaint making reference to its "absolute discretion" to determine
whether a complaint falls within its terms of reference and suggesting that the matters
complained about should be dealt with by a court instead.2
It is also unclear on the basis of which legal requirements the IOI assessed mis-selling
complaints: Mr MEADE in WE 68 provided the following answer to the committee's written
question: "At the time the complaints were received, the conduct of business rules [were] not
in operation. However, the Insurance Ombudsman of Ireland looked at those complaints from
a practical view and considered whether the complainants had been given all of the relevant
material regarding the product...".
In summary, a very limited number of Irish ELAS policyholders appear to have been able to
obtain compensation through adjudications of the Insurance Ombudsman of Ireland scheme in
place at the time. It is uncertain, however, whether the cases found in favour of policyholders
are in any way linked to the allegations made in connection with the events at Equitable that
are investigated by this committee. Furthermore, there is a lack of conclusive evidence that
would make it possible for the committee to clearly determine for which reasons some
complaints by Irish ELAS policyholders were treated by the IOI while others were referred to
the UK FOS. Overall, given the lack of clarity in both jurisdiction matters and legal bases for
adjudicating complaints at the time and taking into account the lack of evidence that the small
1
The IOI continued to refuse to deal with the complainant after the complainant stated that he would be willing
to reduce the amount to €159.999.
2
The fourth rejected complaint is the one submitted by Ms KNOWD, which is referred to in a previous
paragraph.
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number of decisions in favour of the complainant indeed addressed the main issues of the
ELAS affair, it appears that the former IOI scheme did not constitute a satisfactory avenue to
redress for the approximately 4000 Irish policyholders. It should be noted, however, that the
situation has improved since with the establishment of the Financial Services Ombudsman.
Germany
In Germany there has been an Ombudsman for the insurance sector
(Versicherungsombudsmann) since October 2001. In contrast to the UK system and the
recently established Irish Financial Services Ombudsman, the German scheme was not
established by law but by voluntary agreement of the insurance industry, which is also
responsible for its financing. It follows that jurisdiction and powers of the ombudsman are not
defined by law. The scheme is set up in the legal form of a registered association
(eingetragener Verein). Most of the insurance undertakings operating in Germany are
members of the scheme. They include undertakings whose registered office is in other
countries and have set up branches or agencies in Germany. In total, approximately 95% of all
business of the insurance market is covered by the ombudsman scheme.1
The insurance undertakings that are members of the ombudsman scheme have entered into
contractual obligations, subjecting themselves to the jurisdiction of the ombudsman and the
procedural rules promulgated under the scheme (see ES 32). The procedural rules adopted by
the ombudsman prescribe that the ombudsman shall have jurisdiction over any disputes that
arise out of insurance contracts entered into between a consumer and an insurance
undertaking that is a member of the scheme. The consumer may file the complaint in oral or
written form and does not need to be represented by an attorney. In order to be admissible, a
complaint shall not exceed a value of €50.000, it shall not be concerned with the application
of actuarial principles, no lawsuit shall be pending with a court in the same matter and the
claim shall not be time-barred. While the ombudsman has far-reaching discretion in the
settlement procedure, he is bound by statute and law in his decisions. If the value of a
complaint is less than €5.000, he issues a decision which is binding for the defendant but not
the complainant, who may subsequently appeal to the courts. If the value exceeds €5.000, he
issues a recommendation which is not binding for either party. The complainant does not
incur any costs, irrespective of the outcome of the proceedings.
The committee was informed that ELAS was not a member of the German Ombudsman
Scheme (see for instance ES 33, Mr WEYER, H3; Mr DUCOULOMBIER, H9).
Mr THOMSON explained in WE-CONF 21 that this was due to the fact that the German
scheme was established only after ELAS had closed to new business: "Prior to 2001 when the
Society had already closed to new business, there was no applicable consumer complaints
body in Germany". German policyholders therefore did not have access to this route to
redress. Mr WEYER in H3 reflected the experience made by German Equitable Life
policyholders who approached the German Ombudsman for Insurance. They were told that
Institutions which are members of the scheme are listed on the Ombudsman’s website:
http://www.versicherungsombudsmann.de/VOM/Navigationsbaum/WirUeberUns/AngeschlosseneUnternehmen/index.html
2 Pages 70-74.
3 Page 71.
1
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"Equitable Life is not a Member of our association" and advised to "approach the Financial
Ombudsman Service in Great Britain".
c.) Guarantee funds
In his remarks before the committee, Mr WEYER (H3) made reference to a German fund
called "Protektor AG". Mr STEFFEN in H6 also alluded to this fund: "In Germany, you may
perhaps know that for some years we have had a protection scheme which works well. For the
life assurance sector, it is called ‘Protektor’ and was initially a purely voluntary scheme of
the German insurance industry backed by guarantee of EUR 5 billion. This voluntary scheme
has since been placed on a legal footing. Hence it is no longer voluntary, but legally binding.
Its task is to take over and continue contracts of crisis-stricken insurance companies. That
means: we are no longer talking here about compensation in the form of a one-off payment,
we are talking about continuing policies. And in my opinion, keeping policies in operation is
the best form of compensation. Of course – I have already said this – the British rules are
applicable to Equitable Life. It is not possible for German customers who have taken out
British policies with a British insurer to get compensation from a German protection scheme.
Only German insurers are members of this protection scheme in Germany, i.e. it does not
include foreign insurance companies which do not have their registered offices in Germany.
Hence the British rules apply here."
No formal compensation scheme is currently in place in Ireland (see statement of Ms TROY,
H4).
In summary, therefore, no non-judicial routes for redress seem to have been available to Irish
and German policyholders in their respective home countries, apart from those complaints
submitted to the Insurance Ombudsman of Ireland scheme, which seem to have been
investigated.
4.
Access to redress in the United Kingdom
As regards access of non-UK policyholders to redress in the UK, the evidence received
suggests the following:
a.) Complaints to the FSA
As outlined above, a number of policyholders from Germany who approached the German
financial regulators were told that the British regulator would be responsible for prudential
supervision of Equitable Life. BaFin told the committee in H6 that it referred German
complainants to the FSA, when it considered that the subject of the complaint concerns
financial supervision.
In WE-CONF 7, the FSA indicates that it "has received no official complaints from Irish and
German Equitable Life policyholders, although it has corresponded with a small number of
such policyholders, mainly regarding access to the Financial Services Compensation
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Scheme". However, Mr WEYER (H3) and Mr SCHÄFER (WE 10) informed the committee
that the FSA refused to deal with complaints put forward by German policyholders and
referred them back to the German regulator. "We have relevant correspondence of parties
affected with the British supervisory authority ... in which the FSA to begin with mostly
answers in English, which can sometimes be a problem. Apart from that, the FSA generally
states that it is not responsible since the parties affected are German policyholders, in which
case BaFin is responsible. We have called this the ping-pong process, and we can show in a
number of cases that the FSA indeed referred cases back" (Mr WEYER, H3). Commenting on
Mr WEYER's point, Mr BEVERLY from the Commission said that "things are clearly going
wrong with what Mr Weyer referred to as the ping-pong procedure; that needs attention"
(H3).
Mr WEYER stressed that "the German insurance regulator applies the directive in such a
way that it does not consider itself to be responsible and only regards itself as capable of
acting in the field of so-called secondary legal supervision and otherwise refers everything on
to the FSA" (H3). He added that "in this situation, in which according to our personal logic of
course an approach to the FSA should naturally get a response, our experience was
unfortunately an outright rejection of German policyholders by the FSA on the grounds that
they were Germans and therefore the German regulatory system was responsible for them".
Mr WEYER stressed that "through our informal conversations with BaFin we have come to
the firm view that the legal understanding of the FSA is quite incorrect" (H3). "Whether that
amounts to the infringement of some directive provision or not, I would not like to judge". We
can only ascertain that at this point most of those affected, who are now staring poverty in the
face, and whose financial circumstances are also associated with comparable health
problems ... have run out of steam. They are no longer interested in whether an authority has
formal responsibility or not."
The copies of correspondence between German policyholders the FSA, which were made
available to the committee by German policyholders (WE 48, WE-CONF 1 and WE-CONF
10), concern two issues:
Firstly, one policyholder complained that Equitable Life has decided that it will no longer
publish its report and accounts as well as notice of their Annual General Meeting in German
language as this would discriminate against and disadvantage non English-speaking
policyholders. She had previously raised her concerns with the Society, who replied stating
that the costs involved in translating these documents are, in its view, disproportionate to the
benefits. The FSA replied that "in our view, your complaint relates to the way in which
Equitable has conducted its business within Germany rather than to any aspect of the
company's prudential or financial regulation. ... This means that it will be for German rules to
specify what information you are entitled to receive and routine enforcement of such rules
falls to the German regulator. ... The host state only intervenes where there is a systemic
failure by a firm to comply with the requirements of the host State. ... Our present
understanding is that the rules of BaFin do not require translation of the documents you have
mentioned. It follows that we are not aware of any systemic failure by Equitable to comply
with German requirements" (WE 48).
The second piece of correspondence concerns a complaint, which is also referred to under
point IX. 2 c.) of this part of the report. The complainant alleges that he was mis-sold his
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pension as he was not made aware by Equitable Life that his investment would be in a
common pool with Guaranteed Interest Rate (GIR) policies. He argues that the latter have
negatively affected his investment. From his correspondence with the German authorities
(WE-CONF 1 and WE-CONF 10), it appears that BaFin refused to deal with the complaint,
arguing that his complaint concerned 'financial supervision', for which the UK regulator
would be responsible and referred him to the FSA. The FSA, in its reply to the complainant,
argued to the contrary: "The host State regulator is responsible for financial advice given in
Germany and should be able to adjudicate on whether you have a valid complaint" (WE 48,
WE-CONF 1 and WE-CONF 10). The above correspondence appears to relate to complaints,
which do indeed raise conduct of business issues and would therefore have to be dealt with by
the host state regulators.
Mr SEYMOUR in H7, commenting on the FSA's refusal to deal with issues such as the
language of financial reporting, expressed a different view. Firstly he claimed that "ELAS
stated repeatedly in its sales material that it was only regulated in the UK" (see WE 521).
Secondly he stressed that the Life Directive "does not state that conduct of business is ... a
matter for the local regulator, and specifically mentions in Article 15 the requirement in terms
of 'the supervision of business of assurance undertakings with head offices within their
territories, including business carried on outside those territories'". Therefore, in his view,
the UK regulator should have taken responsibility for dealing with the complaints. By
contrast, Mr STRACHAN (H4) points out that "The FSA does not ... impose its conduct of
business rules on EEA branches of UK institutions doing business with policyholders where
the branch is located. Consistent with the Third Life Directive, it falls to the regulator of those
branches – the host regulator in this case – to apply its own rules".
The committee also received submissions by a German citizen who had complained to the
FSA about UK financial service providers other than Equitable Life, offering services via
branches in EU Member States (see WE-FILE 21 by Mr KREGE). He reported similar
experiences in that both the FSA and host Member State authorities refused to deal with his
complaints.
Irish policyholders also wrote to the UK financial regulator, expressing concern and
demanding redress after the crisis had begun to unfold. The FSA made available its
correspondence with Irish policyholders in WE-CONF 20. The FSA typically responded by
providing general information about issues such as the House of Lords judgement, the
prospect of a sale of part of the Equitable to Halifax and the Compromise Scheme. It pointed
out that ELAS remained solvent and that the FSA would "continue to monitor operations of
Equitable". In some instances, the FSA recommended to policyholders "that [they] do not
make any hasty decisions" and pointed out that "surrendering or transferring with-profits
policies at points other than on contractual dates may result in policy values being reduced"
(WE-CONF 20). In response to policyholders who demanded redress, the FSA stressed that
there is "no basis on which we could or should offer compensation". It also advised one
policyholder that "host States have powers and responsibilities in relation to business carried
out under their jurisdiction, and it may be that the Irish authorities have an interest in certain
of the matters in which you might be interested" (WE-CONF 20). From WE-FILE 33 it
1
Annex E of WE contains a copy of an ELAS statement, claiming that ELAS is regulated by the Personal Investment
Authority, the UK conduct of business regulator at the time.
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appears that a number of Irish policyholders were advised by the FSA to complain to the UK
FOS1.
In H8, Commissioner McCREEVY drew the following conclusions with regard to the
treatment and processing of cross-border complaints by national regulators: "One disturbing
aspect to emerge from the Equitable affair is the treatment of complaints to the national
authorities. Complainants have been sent back and forth between the home state authority,
responsible for financial supervision, and the host authority of the branch, responsible for the
conduct of business rules. This is unacceptable in our single market. We have already taken
this up with the regulators meeting in the European Insurance and Occupational Pensions
Committee. The supervisors meeting in the Committee of European Insurance and
Occupational Pensions Supervisors have announced that they are going to review the rules
and procedures to be followed by supervisors in cross-border activity and plan to focus on
consumer protection issues, such as the treatment of cross-border complaints."
b.) Complaints to the FOS
Evidence suggests that some Irish and German policyholders have lodged complaints with the
UK Financial Ombudsman Service. In WE-CONF 72 the UK regulator states that "we
understand from the Financial Ombudsman Service ... that it has received complaints from 74
Irish policyholders and 6 German policyholders". The FOS itself initially did not indicate in
the evidence he submitted to the committee, how many complaints he received from non-UK
policyholders. He only provided a statistical table with information on the handling of ELAS
related complaints, indicating that 1 'German' and 2 'Irish' complaints were 'rejected' (WE 56).
The committee has therefore requested details from the FOS on the exact number of
complaints he has received from German and Irish policyholders, information on whether
these concerned policies taken out in the UK or from Equitable Life's German and Irish
branches and his adjudications on them. In its reply3, the FOS failed to respond to these
questions. It only indicated that "there is one Irish complaint where the FOS has made a
provisional decision. ... That part of the complaint may be [emphasis added] within FOS
jurisdiction. No German complaint has been made to FOS where we consider that even part
of the complaint maybe within FOS jurisdiction."
As regards the territorial jurisdiction of the FOS in general, the committee has obtained the
following information from policyholders. Mr WEYER (H3) said that the FOS told German
policyholders that they would not have access to its services: "We ... received informal
information from the Financial Ombudsman Service which made it clear in respect of
German affected parties that, according to its understanding of the legal position, German
policyholders had no claims, in particular if they concluded their contract on the sovereign
territory of the Federal Republic of Germany." Similarly, the responses by Irish policyholders
to the committee's questionnaire indicate that the FOS generally considered complaints by
Irish policyholders to fall outside its jurisdiction.
1
However, from the evidence received by the committee is appears that - with (at least) one exception complaints by Irish policyholders were not dealt with by the FOS (see below).
2
Page 2.
3
See WE 90.
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On the other hand, Irish policyholder Ms KNOWD said in H2 that after her complaint to the
Irish Insurance Ombudsman was rejected, she lodged a complaint with the FOS in May 2003.
The FOS first rejected the complaint. Ms KNOWD stated that she then had to go through an
"epic 18-month struggle" allegedly facing obstructions and delaying tactics by ELAS until it
was clear in November 2004 that she finally was "entitled to avail to the FOS services" (Ms
KNOWD, H2). In WE-CONF 28, Ms KNOWD quotes from a letter of November 2004 by
"Mr Roberts, Ombudsman" in which the FOS apparently confirmed that it had jurisdiction
over her complaint: "It seems to me that ... in deciding whether a complaint falls within the
territorial jurisdiction of the [FOS] the primary consideration should be whether the act or
omission that gave rise to the complaint was in fact carried out in the UK by a firm operating
from a permanent place of business in the United Kingdom. Equitable Life does have such a
permanent place of business and operates from it." Ms KNOWD did not specify whether the
FOS has taken a decision on her complaint.
The Irish financial authorities informed the committee that they tried to clarify whether Irish
and German policyholders had access to the FOS. Ms O'DEA indicated that the Irish
regulators contacted the UK Financial Ombudsman Service with a view to exploring whether
Irish policyholders would have recourse to it. "Unfortunately, we have not been able to get
clarification on whether Irish policyholders of Equitable Life fall specifically under the
jurisdiction of the UK Financial Services Ombudsman" (Ms O'DEA, H4).
The FOS states on its website that it only "cover[s] firms that provide financial products and
services in or from the UK".1 This was confirmed by Mr TERTÁK (H1) who stated that the
FOS does not consider claims from policyholders who contracted with Equitable's EU
branches, since the product was not provided in or from the UK. The UK regulators in H4 did
not comment on the FOS territorial jurisdiction but only made reference, on a number of
occasions, to the memorandum, which the FOS submitted to the committee, stating that they
had "nothing to add" to it.
In this memorandum (WE 272), the FOS states the following with regard to its territorial
jurisdiction: "FOS may consider complaints about the activities of a firm carried on from
within the UK. However, it may also consider complaints pursuant to the compulsory
jurisdiction about activities carried on from an establishment elsewhere in the EU if (a) the
activity is directed at the UK, and (b) governing contracts are made under the law of England
and Wales, Scotland or Northern Ireland." The paper goes on to say that "insofar as the
selling of Equitable Life’s Irish policies and the provision of information relating to those
polices before and after their purchase was carried on from the Irish Republic, complaints
about such matters fall outside the jurisdiction of FOS. While it might be possible for Irish
Republic investors to make certain complaints against Equitable Life that do fall within the
jurisdiction of FOS, it is unlikely that normal complaints would do so. The position as regards
Equitable Life’s German policies is similar. The involvement of a foreign branch does not
always mean that the service was not actually provided from the UK. FOS has to look at the
facts of the situation; but if the service was actually provided from outside the UK, FOS does
not have jurisdiction". On the other hand, "the ombudsman has expressed his view that he
does have jurisdiction to consider complaints that have been made to FOS by Equitable Life
1
2
http://www.financial-ombudsman.org.uk/
Page 6.
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Guernsey and Dubai branch policyholders, based on his understanding of the extent of the
role that was played by Equitable Life in the UK in the Guernsey and Dubai branch
businesses. These policyholders include nationals of a variety of countries who are not
resident in the UK" (WE 271).
ES 3 concludes as follows: "FOS does not investigate complaints from policyholders who
bought products from branches of UK firms established outside the UK as regards services,
sales or advice obtained there. Is should however be accepted that any instance of post-sale
maladministration attributable to the provider in the UK should be covered by FOS. It follows
from the above that, a policyholder resident in Germany or Ireland would be covered by the
UK FOS scheme if he bought a policy directly from ELAS but would not be so covered if he
bought a policy through a branch of ELAS located in his State of residence, insofar as his
complaint related to the sale of the policy. In relation to such complaints, the policyholder
may or may not be covered by the Ombudsman of the host State depending on the rules which
govern its territorial jurisdiction."
ES 3 refers to an additional aspect of the question of FOS jurisdiction by distinguishing
between complaints about conduct of business and complaints which relate to alleged
breaches of prudential rules: "The jurisdiction of a national Ombudsman should be coterminous with the scope of application of the rules to which the complaint relates. Thus, if
the complaint relates to the alleged breach of the conduct of business rules, it should be the
responsibility of the Ombudsman of the host State to examine the complaint since it is the
conduct of business rules of the host State which apply. If, by contrast, the complaint relates
the alleged breach of a prudential rule, responsibility to investigate it should lie with the FOS
since [ELAS is subject to the prudential rules in the UK] under the Life Directive" (ES 32).
From the evidence obtained, however, it appears that the FOS does not normally concern
itself with complaints about alleged breaches of prudential rules, even if this would not be
precluded, in principle, by the FOS's statute, which states that the FOS's compulsory
jurisdiction extends to any complaint relating to an activity regulated under the Financial
Services and Markets Act.
In essence, since most non-UK policyholders have purchased their policies from ELAS
branches outside the UK, the vast majority of them were excluded from this avenue to redress.
While evidence suggests that no German complaint was accepted by the FOS, the latter
appears to have dealt with at least one complaint from an Irish policyholder. It is not clear,
however, on which basis the FOS decided whether or not an Irish complaint fell under its
jurisdiction.3 At the time, there seems to have been confusion about this issue, not only among
policyholders but also among the institutions concerned. As noted above, even the Irish
authorities, who had contacted the UK Financial Ombudsman Service with a view to
exploring whether Irish policyholders would have recourse to it were "not able to get
clarification on whether Irish policyholders of Equitable Life fall specifically under the
jurisdiction of the UK Financial Services Ombudsman".
1
Page 6.
Page 14.
3 The decision on jurisdiction appears to have been taken a long time after some of the complaints were lodged, e.g. 18
months in the case of Ms KNOWD (see H2).
2
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c.) The UK Parliamentary Ombudsman
As mentioned above, the UK Parliamentary Ombudsman is currently carrying out an
investigation "to determine whether individuals were caused injustice through
maladministration in the period prior to December 2001 on the part of the public bodies
responsible for the prudential regulation of the Equitable Life Assurance Society and/or the
Government's Actuary Department; and to recommend appropriate redress for any injustice
so caused" (WE 121). It is important to note that her investigation only covers the period up to
1 December 2001, as the FSA, which was established as the sole regulator from that date, is
not a body within her jurisdiction. Likewise, the Ombudsman can only inquire into the actions
of those charged with the prudential regulation of ELAS, while she cannot consider
complaints about the conduct of business or marketing issues.
Complaints to the UK Parliamentary Ombudsman have to be referred by a Member of the UK
House of Commons. According to Mr LAKE (H1) therefore, "the UK Parliamentary
Ombudsman is not, as a matter of legal implementation, available to other than subjects of
the British Crown through their Member of Parliament". Therefore, as Mr SEYMOUR
pointed out, "a Community citizen from outside the UK cannot appeal to the UK
Parliamentary Ombudsman" (H7). The original position taken by the Ombudsman's office as
expressed in its letter to EMAG was such that international policyholders (who have
contacted with ELAS' branches outside the UK) would not be covered by the investigation
(WE 142). However, the Parliamentary Ombudsman reversed this position after having
obtained legal advice. In a letter3 to Mr BRAITHWAITE, the Ombudsman's office states that
"our investigation is indeed capable of covering the position of all international policyholders
who claim to have suffered injustice as a result of maladministration in the prudential
regulation of Equitable Life prior to 1 December 2001" and that "any findings and
recommendations we might make at the conclusion of the investigation will therefore also
address the position of such policyholders". According to the letter, this decision was based
on a confirmation by the UK Treasury that in practice all prudential regulation was
undertaken by the UK regulator and that complaints about such regulation would therefore
concern rights or obligations arising within the UK. Mr LAKE (H1) was of the opinion that
the decision to cover international policyholders was "a discretionary measure and not a legal
prescription". Commissioner McCREEVY welcomed the Parliamentary Ombudsman's
undertaking "because, in a single market, it is not acceptable that non-UK policyholders
would not receive the same treatment as UK policyholders" (H8).
d.) The UK Financial Services Compensation Scheme
The FSCS states on its website4 that it can only consider claims against firms that were
authorised by a UK regulator at the time the advice was given. The common understanding of
witnesses heard before the committee is such that the FSCS, in principle, would not cover
claims for compensation from the customers of foreign branches of UK insurance
1
Annex B.
Page 42.
3 The position of 'international' policyholders in relation to the Parliamentary Ombudsman's investigation; Letter from the
Ombudsman's office to Mr Braithwaite, General Secretary of EMAG, dated 9 May 2005.
4 http://www.fscs.org.uk/
2
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undertakings (see, for instance, statements by Mr TERTÁK, H1; Mr LAKE, H1; Mr WEYER,
H3; Ms O'DEA, H4, Mr STEFFEN, H6).
Following requests from Irish policyholders1, the Irish authorities sought to obtain
information from the UK authorities as to whether Irish policyholders would qualify for
compensation in the event of insolvency. The advice received was to the effect that the
position of Irish policyholders regarding the right to compensation under the scheme is legally
complex and "would need to be assessed ... on a case by case basis." (Ms O'DEA, H4).
In WE 212 BaFin indicates that it examined whether German customers of Equitable Life
could benefit from the FSCS in the event of insolvency. According to them, policies signed by
German customers before the creation of the FSCS on 1 December 2001 (which is the case
for all German policies) are protected if they were signed with a UK authorised undertaking
or one of their EU subsidiaries and if they already fell under the protection of its predecessor,
the Policyholder Protection Fund, created in 1975. The second condition is only met (in case
'the protected risk is situated outside the UK'3) if the policies were signed with an
establishment in the UK. From 1997 onward, protection was extended to policies that were
signed with subsidiaries in EEA countries, but only if the risk or commitment is situated in
the UK. Hence, policies concluded with foreign branches by non UK residents, which
represents the most typical situation, would not be protected according to the information
received from BaFin. According to Mr STEFFEN (H6) "this did not change significantly after
2002, as the criterion was either that the contract had actually to have been signed in Britain
or the insured risk still had to be located in Britain, i.e. the policyholder had to live in Britain.
In our estimation – and I cannot say this with absolute certainty – that would not apply to the
great majority of customers in Germany. We had meetings in Bonn to discuss with our British
colleagues whether there could be a gap between, on the one hand, the British compensation
scheme, which basically applied to British customers, and the protection available to
European customers. At all events the FSA did not contest our assessment that German
customers were not protected, but we both considered this point without identifying any
possible remedy".
WE 844 by Mr HOLMES in this context refers to Article 12 of the EC Treaty which provides
that any discrimination on the grounds of nationality shall be prohibited and stressing that
"residency is recognised in Community case-law as a close proxy for nationality". It may
therefore be considered that requirements for access to the UK compensation scheme
discriminates against non-UK residents and therefore breaches Article 12 of the EC Treaty.
However, the question of access to guarantee schemes has been of little practical relevance to
ELAS victims, since the UK scheme has never come into play, given that the Society was
neither at default nor insolvent.
In summary, it appears that non-UK policyholders generally have no access to the two UK
bodies designed to deal with insurance complaints or insurance undertaking failures (FOS and
FSCS). Mr TERTÁK (H1) therefore concluded that, "non UK Equitable Life Members are
1
See for instance letter with attachments by Mr O'Broin dated 8 March 2006 (WE 3).
Pages 3 and 4.
3 i.e. with profits policyholders resident outside the UK.
4 Page 24.
2
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clearly in an unfavourable position." Mr WEYER (H3) suggested that court action would
"really [be] the only recognisable legal remedy available to the European consumer".
Given the currently unsatisfactory situation, the Commission has "been working with Member
States for some time on the subject of insurance guarantee schemes and is currently
considering whether to table a proposal for a Directive to require each Member State to
establish such a scheme covering both domestic and EU foreign branches customers and
beneficiaries", according to Mr TERTÁK (H1). Ms O'DEA (H4) specified that the
Commission has convened a working group to consider how a minimum level of
harmonisation in relation to insurance compensation might be achieved to ensure that
consumers dealing with cross-border insurers would have access to the compensation
available in the home Member State of the insurer. "We believe that this should go forward",
said Ms O'DEA. Mr MAXWELL of HM Treasury (H4) also expressed support, in principle,
for a European Directive covering insurance guarantee schemes: "Unlike in the case of
banking deposits, there is currently no European framework for the operation of national
insurance compensation schemes. ... The UK has indicated that it would not stand in the way
of a soundly based proposal. But any proposal for a Directive on insurance guarantee
schemes can only be one part of a system that must include improved co-operation between
home and host state supervisors." Similarly, Mr STEFFEN from BaFin said that "we watch
with great interest the further development of discussions between the European Member
States on a harmonised legal framework for protection schemes in the European Union ... and
Germany is participating constructively in these efforts" (H6).
5. Court action
As far as possible court action against insurance providers is concerned, Council Regulation
(EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil
and commercial matters provides in general that jurisdiction is exercised in the Member State
in which the defendant is domiciled regardless of his or her nationality. Section 3 (Articles 8
to 14) lays down specific rules for matters relating to insurance. Article 9 paragraph 1
stipulates that "an insurer domiciled in a Member State may be sued (a) in the courts of the
Member State where he is domiciled, or (b) in another Member State, in the case of actions
brought by the policyholder ... in the courts for the place where the plaintiff is domiciled".
Article 9 paragraph 2 specifies that "an insurer who is not domiciled in a Member State but
has a branch, agency or other establishment in one of the Member States shall, in disputes
arising out of the operations of the branch, agency or establishment, be deemed to be
domiciled in that Member State". The Regulation also provides for the recognition and
enforcement of judgements by the Member States concerned.
It follows that Irish/German policyholders, who have contracted with Equitable Life in the
UK, would have the choice of suing the company either in the UK or in the country where
they are domiciled, which will most likely be Ireland/Germany. On the other hand,
Irish/German policyholders who have contracted with Equitable Life's branches in
Ireland/Germany would have to sue Equitable in Ireland/Germany (unless they are not
domiciled in another Member State). The vast majority of Irish/German policyholders have
purchased their policies from ELAS branches in Ireland/Germany, so they would have to sue
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the Society there.
Article 32 of the consolidated Life Assurance Directive lays down rules as to which law is
applicable to the insurance contracts. Accordingly, a life assurance contract is governed by the
law of the Member State of the commitment, i.e. the Member State where the policyholder
has his habitual residence. Where the law of that State so allows, the parties may choose the
law of another country. In any event, where the policyholder is a natural person and has his
habitual residence in a Member State other than the State of his nationality, the parties may
choose the law of the State of which he is a national. However, the above rules do not restrict
the application of the rules of the law of the forum in a situation where those rules are
mandatory, irrespective of the law otherwise applicable to the contract.
By way of example, ES 31 examines the choice of law for German policyholders in pursuing
claims against the Society: "Whether German policyholders can invoke claims under English
law in a German court depends on principles of private international law. Different rules
apply depending on the type of claim that the policyholder wishes to pursue." As regards
contractual remedies, ES 3 concludes that "in the case of a German policyholder concluding a
contract with Equitable Life, the default law that governs the contract and possible breaches
of obligations arising under the contract is German law. The parties may choose another law
but their choice is restricted. English law may be elected if a UK national has his/her habitual
residence in Germany. ... [If] Equitable Life has pursued the activity of insurance in Germany
neither through subsidiaries or branches nor through agents, the parties to the contract can
choose any law if the policyholder has his/her habitual residence in Germany." With
reference to tort law remedies, ES 3 states that "in the case of a policyholder with his/her
habitual residence in Germany (and therefore his/her assets in Germany) who has suffered
financial loss due to the tortuous acts of Equitable Life or one of its employees, the
policyholder has the choice whether to pursue remedies under German or English law."
Mr STEFFEN (H6) commented that he "cannot make any criticism of this legal solution, it is
consumer protection in the best sense". He regards the fact that non-UK policyholders when a
problem arises "do not have to contend with British law" as an advantage for them.
Mr WEYER (H3), however, expressed doubt as to the ability of the German regional courts to
assess possible cases brought against ELAS: "I would also mention here that this would be
particularly difficult for us because the material is highly complex. From a German point of
view, we are dealing with matters that have international legal implications. In addition,
questions of actuarial expertise, regulatory law and insurance contract law need to be
clarified, and the evidence in our possession is predominantly from the United Kingdom,
hence in English. We assume that an average regional court, which would normally have
jurisdiction in such cases, would be largely overstretched by such matters. The legal expenses
risk is also a formidable factor for the German consumer in this respect."
The committee has become aware of a case brought against ELAS before a German court.
Mr STEFFEN told the committee in H6 that "a German lawyer wrote to me seeking
assistance from the German regulator in a court case. ... I think it related to proceedings in
the Düsseldorf Regional Court. Up to now we have felt that we are well covered as a German
supervisory authority, because we do not think that it can be the role of the regulator to
1
Pages 68 to 70.
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conduct negotiations in individual cases between parties to a contract. I hear that these
negotiations are continuing and I also hear – but that is my subjective impression – that
indeed concrete settlements and settlement sums are being negotiated and discussed in the
case. I cannot tell you, however, what the outcome will be".
As regards Irish policyholders, Ms KNOWD (H2) told the committee that "we are in
litigation with Equitable but our case is stayed at the moment". Ms KNOWD did not specify
whether the case was brought before a court in Ireland or in the UK. No information has been
made available to the committee as to whether any other Irish policyholders have brought
court cases against Equitable Life.
As far as claims against supervisory authorities are concerned, ES 31 specifies that Regulation
(EC) No 44/2001 does not apply. Therefore an action in damages against UK authorities
would be subject to English law and would have to be brought before UK courts: "This
reflects the general principle of territoriality which applies in matters of public law. Thus,
claims against the UK regulatory authorities are governed by English law which is
responsible for determining whether and under which conditions a non-UK policyholder can
recover losses. It should be noted however in this context that Member States are bound by
the fundamental principle of non-discrimination on grounds of nationality laid down in
Article 12 EC and thus, differential treatment against policy holders who are not resident in
the UK would be liable to be indirect discrimination on grounds of nationality" (ES 3).
As stated above, several witnesses highlighted the legal hurdles and financial risks involved in
pursuing claims against the UK regulator, even for UK citizens. In respect of non-UK citizens
it was stated that "the legal environment in the UK is not only unfamiliar to most [of them] but
also considerably riskier than their home legal environment" (see Mr LAKE, H1). Evidence
suggests that no non-UK policyholders have taken legal action against the UK regulator.
X
Potential remedies for ELAS victims under EU law
This part deals with remedies available to policyholders under EU law. Firstly, it investigates,
whether secondary law, such as for instance the Third Life Directives itself, provide for
redress mechanisms. Secondly, the report focuses on the system of judicial protection under
primary EU law with regard to loss and damage caused to individuals by breaches of
Community law. Finally, the committee looks at coordination mechanisms at EU level, such
as FIN-NET, which was established to facilitate the treatment of cross-border consumer
complaints.
1.
The Third Life Directive
As stated previously, Article 36 (Article 31 of Directive 92/96/EEC) requires Member States
1
Pages 108 and 109.
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to lay down detailed rules in order to ensure that policyholders receive adequate information
before the assurance contract is concluded. After the conclusion of the contract, policyholders
have the right to be kept informed throughout the term of the contract of any change
concerning relevant information related to the contract. This Article should be read in
combination with Annex III of the Directive (Annex II of Directive 92/96/EEC). The Annex
states that the information to be communicated to the policyholder must be provided in a clear
and accurate manner, in writing, in an official language of the Member State of the
commitment. Section A of that annex lists the information that must be communicated to the
policyholder before the contract is concluded, whereas Section B lists the information that
must be given to the policyholder during the term of the contract. Under Article 36(3) of the
Directive, the Member State of commitment may require the insurance company to furnish
additional information to that specified in the Annex "only if it is necessary for a proper
understanding by the policyholder of the essential elements of the commitment".
ES 31 contends that the minimum disclosure requirements laid down in the Directive are
sufficiently precise and thus grant rights to individuals vis-à-vis insurance companies, which
may be enforced once implemented into national law. However, Directive 2002/83/EC does
not itself provide for any contractual remedies in favour of policyholders. Hence, "the
remedies available for breach of Article 36 are those provided by national law" (ES 32). As
was shown under point VI 2 a.), UK disclosure requirements are more extensive and specific
than Article 36 of the Directive. The latter for instance appears in itself insufficiently specific
to serve as a basis for a right on the part of a non-GAR Equitable policyholder to have the
GAR risk disclosed, whereas under UK law such risks ought to have been disclosed.
However, ES 3 makes clear that in theory, had the UK failed to require an insurance company
to make a disclosure required under the Directive, the policyholder may have a right to
reparation against the state, if he/she has suffered loss as a consequence of that failure. The
conditions for supervisory liability under EU law will be further explored below.
It is worthwhile noting that the information to be provided includes "the arrangements for
handling complaints concerning contracts by policyholders, lives assured or beneficiaries
under contracts including, where appropriate, the existence of a complaints body without
prejudice to the right to take legal actions" (Annex III, Section A, point (a)15 of Directive
2002/83/EC).
Hence, according to these provisions, Equitable Life should have been obliged to inform
policyholders, including customers of German and Irish branches, of arrangements and bodies
responsible for handling their complaints. The committee has sought to examine whether
ELAS complied with this requirement in all instances. Mr LLOYD former ELAS salesman in
the UK said in H5 that "[UK sales staff was] well briefed on compliance with regulatory
requirements, as in ‘when you see a client you must give them a fact-find; you must give them
the key features’. Certainly within the documentation there would have been references to the
ombudsman and how to complain and the sort of standard sales information. I always
understood, and in fact I believe it to be true, that Equitable was as good as any UK life office
sales force in giving the right information to our clients". However, given the confusion
among policyholders from Ireland and Germany about which body they could turn to with
1
2
Page 88.
Page 89.
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their complaints, the committee sought information as to whether they have been given all
relevant information by ELAS. Mr THOMSON in H8 gave the following reply: "The
Society’s procedure as regards Irish complainants was to provide details of the Insurance
Ombudsman of Ireland when the Society issued its final response to the complainant. As
regards German policyholders, the Society is not aware of there being any equivalent
ombudsman service, so complaints were dealt with by the society". WE-CONF 21 informs
that in Germany, "policy terms also state that policyholders may have recourse to the local
courts should they wish to bring a claim".
By contrast, Ms KNOWD (H3) claimed that "Equitable informed Irish members that [they]
could not avail of the services of the FOS" while it proved that this was not true (at least in her
case). Mr THOMSON maintained that "I am not aware of Irish policyholders being told that
they cannot approach the UK FOS" (H8). "However, we have told Irish policyholders that the
UK FOS may decide that it is unable to consider their complaint. As I have just said, our
normal practice was to refer Irish policyholders who are dissatisfied with our response to
their complaint to the Insurance Ombudsman of Ireland. That is because we believed that to
be the most suitable body to deal with complaints from Irish policyholders about policies that
were sold in Ireland" (H8).
The implementation of the information requirements laid down in Article 36 in connection
with Annex III of the Directive falls within the competence and responsibility of the Member
State of the commitment. IFSRA informs the committee in WE 80 that "Annex III of Directive
2002/83/EC was transposed into Irish legislation by way of Statutory Instrument 360 of 1994.
Article 45 of Part 5, requires that an insurer should provide to a policyholder before the
conclusion of a contract certain information, specified in greater detail in Annex III of the
Regulations. The complaints handling information ... is included at point 15 of Annex III. The
Equitable Life Society was bound by this provision." As regards the situation in Germany, Mr
WESTPHAL, claims in WS 2 that German law had not been in compliance with the
requirements laid down in Annex III of the consolidated Life Directive. The practical impact
of the German legislation governing the conclusion of insurance contracts - the so-called
Policenmodell - is that the insurance contract is deemed concluded even if the policyholder
has not yet received all the information required by the EU Life Directive. This would be
contrary to the principle laid down in the Directive stating that policyholders must be duly
informed before they enter into a contractual obligation. According to Mr WESTPHAL, the
German consumer association therefore lodged a complaint to the Commission in 1994,
which he claimed was not pursued further. Mr WESTPHAL informed the committee that the
Commission has started infringement procedures1 against Germany only after another
complaint was lodged for the same reasons 11 years later in 2005. The Commission sent a
reasoned opinion to the German Government in October 2006. Mr WESTPHAL indicated that
German legislation will now be brought into compliance with the requirements of the Life
Directive. Since the disclosure requirements in Annex III of the Directive are not relevant in
connection with the main mis-selling allegations against ELAS, this point is not examined
further in this part of the report.
While policyholders have to be informed about complaints procedures and bodies, where they
1
A Commission press release of 12 October 2006 indicates that the Commission sent a letter of formal notice to the German
Government.
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exist, neither the Life Directives nor any other piece of EU legislation requires Member States
to provide for redress mechanisms, be it for domestic or EU branch customers. Mr TERTÁK
underlined this in his statement before the committee: "There is currently no obligation under
European law to have either a financial services ombudsman service that can require the
payment of compensation or a guarantee scheme to pay claims in the event of the failure of an
insurance undertaking" (H1).
Therefore, the UK authorities stressed before the committee that the UK "has been at the
forefront of providing redress mechanisms for policyholders and has consistently gone
beyond European requirements in providing ombudsmen and compensation schemes"
(Mr MAXWELL, H4), even though they do not seem to be available to customers of branches
established in other Member States. As stated previously, Ombudsman schemes also exist in
Ireland and Germany. Mr MERRICKS emphasises in WE 56 that current Ombudsmen
schemes in the UK and Ireland are more comprehensive and have more extensive powers to
adjudicate than most comparable schemes in other EU Member States, including Germany.
As mentioned above, compensation schemes currently exist in the UK and Germany but not
in Ireland.
In his remarks before the committee, Mr SEYMOUR (H7) referred to Article 13 of Directive
92/96/EEC, emphasising that it would require "the supervisor of the home Member State to
prevent or remedy any irregularities prejudicial to the interests of the assured persons" He
argued that the UK regulator, however, refuses to remedy the situation and "continues to take
every possible step to block democratic paths to remedy for the losses inflicted". According to
Mr SEYMOUR this "is a serious violation of the Third and Fourth Life Directives".
Responding on this point, Mr BEVERLY from the Commission made it clear that the
reference to 'remedy' in this Article does not mean the payment of compensation: "The Article
in question deals with powers of the supervisors. The competent authorities must have the
power to prevent, stop, or put right any irregularities prejudicial to the interest of the assured
persons. Put simply, that provision does not deal with the payment of compensation. To my
knowledge, there are no provisions in any of the Life Directives that are concerned with the
payment of damages or compensation. That is currently a matter for national law" (H7).
Commissioner McCREEVY reiterated this point in H8: "The insurance Directives do not deal
with or make any reference to the question of compensation."
Mr ALEXANDER expresses the view that "European law should have a role to play in
further defining the remedies available to policyholders to bring claims for losses arising
from breach of EU legislation against third party firms". Such remedies would not replace but
complement existing remedies under national law.(WE-FILE 311). According to him, it
should be defined exactly what losses should be compensated and how compensation is
calculated. Legislation should also "address the elements required for a policyholder to bring
a claim or define requirements for a policyholder to bring ... civil action against a firm or an
individual in breach of EU law" (WE-FILE 31). Mr KERN suggests that "European
legislation could amend existing directives to provide remedies for private individuals to
bring civil claims in Member State courts ... Alternatively, a separate directive could be
adopted that provides for remedies for losses suffered from violations of any number of
existing EU directives ... that govern life assurance and financial services more generally"
1
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(WE-FILE 311).
2.
Primary EU law
a.) The right to petition and complaints to the European Commission
Under Article 194 of the EC Treaty, any citizen of the European Union, or resident in a
Member State, may, individually or in association with others, submit a petition to the
European Parliament on a subject which comes within the European Union's fields of activity
and which affects them directly. The petition may present an individual request, a complaint
or observation concerning the application of EU law or an appeal to the European Parliament
to adopt a position on a specific matter. Such petitions give the European Parliament the
opportunity of calling attention to any infringement of a European citizen's rights by a
Member State or local authorities or other institution. Depending on the circumstances, the
Committee on Petitions may, for instance, ask the European Commission to conduct a
preliminary investigation and provide information regarding compliance with relevant
Community legislation. In some exceptional cases, the committee may submit a report to
Parliament to be voted upon in plenary or conduct a fact-finding visit. It may also seek to
cooperate with national or local authorities in Member States to resolve an issue raised by a
petitioner. The Petitions Committee cannot, however, override decisions taken by competent
authorities within Member States. As the European Parliament is not a judicial authority, it
cannot pass judgement on, nor revoke decisions taken by the Courts of law in Member States.
Similarly, the European Parliament does not have the power to award compensation to
petitioners who have suffered loss as a consequence of incorrect transposition of EU law.
In the case of Equitable Life, the European Parliament indeed received a number of petitions,
in which it is alleged, among other things, that policyholders have suffered due to the failure
of the UK Government to regulate or supervise ELAS in a satisfactory way in accordance
with the relevant Community insurance legislation (see WE 14 and WE 15). The committee
declared the petitions admissible and asked the European Commission to comment on the
various issues raised by the petitioners. The petitioners were furthermore invited to present
their case to the committee at its meeting of 13 September 2005.
In their address to the committee (WE 44), the authors of petition 0029/2005 asked the
committee "to engage the institutions of the Community in obtaining correction and remedy"
and "to invite [the Commission] to establish the facts, which would be helpful to investors in
recovering their losses". Petitioners also suggested that the Commission "has grounds to act
against the UK Government at the European Court of Justice". The Commission, however, in
its written submission to the Petitions Committee2, made it clear that it is its role "to make
sure that the UK is currently in conformity with the relevant EU legislation" and that it
"cannot make any pronouncement on the content and application of the former regulatory
regime which has now been replaced". It summarised this point as follows: "The Commission
has consistently maintained, in full conformity with the jurisprudence of the Court of Justice
1
Page 3.
2
European Commission: Notice to Members of 22 June 2005 concerning petitions 0611/2004 and 0029/2005.
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on the role and purpose of infringement proceedings, that the objective of such proceedings
under EU law is to establish or restore the compatibility of existing national law with EU law,
and not to rule on the possible past incompatibility of a national law which has since been
amended or replaced."1
The Equitable Life petitions eventually led Parliament to set up the present Committee of
Inquiry to investigate the issue.
Besides petitioning the European Parliament, citizens have the possibility of bringing forward
complaints to the Commission, although, in contrast to petitioning, this is not a right granted
by the Treaty. In its Communication to the European Parliament and the European
Ombudsman on relations with the complainant in respect of infringements of Community
law2, the Commission notes that "anyone may file a complaint with the Commission free of
charge against a Member State about any measure (law, regulation or administrative action)
or practice by a Member State which they consider incompatible with a provision or principle
of Community law". Any correspondence which is likely to be investigated as a complaint is
recorded in a central registry of complaints kept by the Secretariat-General of the
Commission. After investigating the complaint, Commission officials may ask the College of
Commissioners either to initiate infringement proceedings against the Member State in
question under Article 226 of the Treaty, or to close the case. The Commission decides on the
matter at its discretion. In its annual reports on monitoring the application of Community law,
the Commission has regularly acknowledged the vital role played by the complainant in
detecting infringements of Community law. For instance, in 2005, complaints accounted for
around 43.5% of the total infringements detected.3 While the Commission may decide to
initiate infringement proceedings against a Member State, it cannot award compensation to
complainants. However, the launch of infringement proceedings may facilitate matters for a
claimant to substantiate claims for damages under Francovich. This point is further discussed
below.
In an internal Commission note dated 19 March 2004, which the Commission provided as part
of WE-CONF 11 it is stated that "in total we have received 7 complaints from individual
citizens, 5 letters from MEPs and two EP written questions [concerning Equitable Life]". In
H1, Mr TERTÁK quoted from the Commissioner's reply to a letter from Mr Perry, MEP: "In
normal circumstances, where an aggrieved party considers that national supervisory
authorities have not properly respected the requirements of the relevant EC directives,
redress may be sought by application to national courts. Furthermore, in such cases, national
courts also have the power to award damages to aggrieved parties, something the
Commission cannot do. ... At the present time, the Commission is not aware of any
infringement of the EU insurance directives in connection with Equitable Life, but it will
review the position in the light of the results of the Penrose Inquiry, if necessary". Similarly,
according to WE-CONF 11, the Commission's initial response to the complaints by citizens
had been "that we would await the outcome of the independent report ... by Lord Penrose
before determining what action, if any, should be taken".
By the time the Penrose report had been published, the Commission stressed (by analogy with
1
European Commission: Notice to Members of 22 June 2005 concerning petitions 0611/2004 and 0029/2005.
COM(2002) 141 final, Annex.
3 23rd Annual report from the Commission on monitoring the application of Community law (2005); COM(2006) 416 final.
2
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the position it expressed in response to the request for information by the Petitions
Committee) to complainants that the events complained about related to a prior regulatory and
supervisory regime which has since been replaced by the UK (WE-CONF 11). In WE 11, the
Commission explained its position as follows: "The Commission is not in a position to take a
definitive view on whether there might have been an infringement in the practical application
of the directive in the case of Equitable Life and, even if it were able to take such a view and
was convinced that there had been an infringement in practice, it would not be able to take
infringement proceedings before the Court. ... The Court of Justice had ruled that the purpose
of proceedings was 'to bring about a change in behaviour on the part of the recalcitrant State,
and not to record in abstracto that a failure existed in the past'. The Court had held that the
'Commission may not bring proceedings before the Court for Treaty infringement unless a
Member State has failed to comply with the reasoned opinion within the time-limit notified to
it for that purpose'2... In the case of Equitable Life, the Commission had declared itself
satisfied with the UK’s implementation of the relevant Directive and any problems appear to
be problems of practical application rather than of transposition. The Commission had seen
no reason to begin infringement proceedings, no reasoned opinion was issued and it was
quite clear that the UK life insurance regulatory and supervisory regimes that had been
called into question by various correspondents, complainants and petitioners had been
radically amended since the occurrence of the problems brought to the Commission’s and
Parliament’s attention."
The Commission noted in conclusion that "since the main point at issue appeared to be the
payment of compensation ... it had consistently stated that action to seek compensation had to
be pursued before the national authorities and courts", which would be "true even where the
Community directives directly conferred rights on individuals" (WE 13).
Complainants and petitioners regarded the Commission's reluctance to investigate the alleged
incompatibility of the former UK regulatory regime with the Third Life Directive as highly
unsatisfactory. For instance, EMAG notes in WE 44 that "pensions savings are products
accumulated over 50 years or more, to provide for old age" and that "it can take decades for
black holes to be revealed, as with Equitable". EMAG suggests that it would therefore be
"unacceptable for the Commission to refuse to address past failures" and asks: "In what
effective legal framework can offenders walk away just with promises to reform?" The
Commission says in WE 1 that it is "fully aware that petitioners find this position
unsatisfactory". "Nevertheless this is the only position the Commission can adopt given its
role and the nature of infringement proceedings under Community law" (WE 14). The
Commission does not believe that there is a loophole since it "did not see what would be the
purpose of bringing proceedings to establish that an infringement might have existed in the
past" (WE 15).
For the reasons set out above, neither the European Parliament nor the European Commission
can order the payment of compensation to petitioners or complainants, who have suffered loss
as a consequence of an alleged failure by a Member State to implement and apply EU
1
Pages 7-9.
Case C-349/99 Commission v Italy, ECR (2002) p.I-305.
3 Page 9.
4 Page 9.
5 Page 9.
2
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legislation correctly. However, if an EU institution were to establish that actions or omissions
by a Member State were not in conformity with EU legislation, this could help plaintiffs to
pursue claims through the appropriate judicial channels.
It is therefore understandable that petitioners and complainants are disappointed by the
Commission's reluctance to look into alleged breaches that lie in the past and have since been
remedied. The committee accepts that the Commission cannot launch infringement
proceedings in such cases. Indeed, as it notes in WE 11, the Commission has to respect the
rules of the Treaty and the jurisprudence of the Court and any modifications of the rules on
infringement proceedings would require a formal Treaty amendment. For this reason,
Parliament will not be able to satisfy those policyholders who had expressed their hope that
the European Parliament would make a recommendation to the Commission "to instigate
proceedings in the European Court of Justice (ECJ) to bring an action against the UK
Government for failing to operate in accord with the EC Directives" (Mr BRAITHWAITE, H
10).
However, the Treaty provisions do not prevent the Commission from investigating alleged
past breaches as such (without subsequently launching infringement proceedings). In the
committee's view, this would be particularly justified in cases such as Equitable Life, where a
large number of citizens across Europe are affected by the alleged breaches. As regards the
Treaty provisions on infringement proceedings, the committee considers that there are
loopholes because failures to implement in many cases become apparent only decades later.
One may therefore consider amending the Treaty provisions in a way that would
fundamentally change the nature of infringement proceedings, so that Member States can be
penalised for past breaches. The committee believes it would be worthwhile to assess the
potential merits of such a modification, such as increased incentives for Member States to
implement EU legislation in a correct and timely manner.
The Equitable Life case highlights once more the importance and significance of the right of
EU citizens to petition the European Parliament. While the Commission refused to investigate
the matters raised by complainants, Parliament decided that the allegations made by
petitioners are serious enough to warrant an in-depth investigation and set up the Committee
of Inquiry in response. Although it does not itself have the power to award compensation to
petitioners, Parliament may make any recommendations it deems appropriate in this regard.
b.) Regulatory liability under EU law
As outlined in Parts II and III of this report, the committee identified several regulatory
failures by the UK authorities responsible for the supervision of ELAS. It furthermore
concluded that the UK authorities failed to apply properly the standards of prudential
supervision laid down in Directive 2002/83/EC. In the comments set out below, we will
examine whether the failure by the UK to comply fully with the provisions of the Directive
may give rise to claims by aggrieved policyholders for compensation.
According to the case law of the European Court of Justice, a Member State which fails to
1
Page 9.
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comply with Community law may be liable in damages to a person who has suffered loss as a
result. Under the Francovich case law1, the conditions of liability are the following:

the rule of law infringed must be intended to confer rights on individuals;

the breach must be sufficiently serious;

there must be a direct causal link between the breach of the obligation resting on the
State and the damage sustained by the injured party.
According to ES 32, the first condition is automatically met where a Member State fails to
adopt implementing measures. Where a Member State enacts implementing measures but they
fall short of the requirements of the Directive, the breach is not necessarily serious. In order to
determine whether the incorrect transposition amounts to a serious breach, all the
circumstances of the case must be taken into account. The factors being material in
determining whether the infringement passes the threshold of seriousness are listed by the
ECJ in the Brasserie case. These are: the clarity of the rule breached; the measure of
discretion left to the national authorities; whether the infringement and the damage caused
was intentional or involuntary; whether any error of law was excusable or inexcusable;
whether the position taken by a Community institution may have contributed towards the
omission; the adoption or retention of national measures or practices contrary to Community
law. In its judgment on case C-278/05 ("Robins") of 25 January 2007, the ECJ recalled that
the condition requiring a sufficiently serious breach of Community law implies manifest and
grave disregard by the Member State for the limits set on its discretion, the factors to be taken
into consideration in this connection being, inter alia, the degree of clarity and precision of the
rule infringed and the measure of discretion left by that rule to the national authorities. The
Court suggests, in paragraph 81, that a Commission report indicating that it was satisfied with
the implementation of the relevant legislation by the United Kingdom, may be a factor
indicating that the breach is not sufficiently grave or manifest. However, even though the
position taken by the Community institutions is a relevant factor, doubts could be raised as to
whether a Member State in breach of Community law should be entitled to benefit from
equivocal or cautious pronouncements by one of the Community institutions, especially when
one considers that the concept of implementation of Community law is a dynamic one, which
may evolve in the course of time.
In relation to ELAS, the main failure of the UK, as established in Parts II and III of this
report, was not incorrect transposition but failure by the administration to apply and enforce
the provisions of the Directive. ES 3 makes it clear that such failure is considered to be a
breach of Community law and is therefore treated accordingly. The factors used in
determining whether the breach is serious are the same as the ones mentioned in the above
paragraph in relation to incorrect transposition.
ES 3 states, that it would be difficult to establish that the breach of Community rules by the
UK authorities in relation to ELAS was serious. Only the "authorities' failure to examine and
1
See Joined Cases C-6 and C-9/90 Francovich and others [1991] ECR I-5357; Joined Cases C-46 and 48/93 Brasserie du
Pecheur v Germany and the Queen v SS for Transport ex parte Factortame [1996] ECR I-1029; Joined Cases C-178, C-179,
C-188-190/94 Dillenkofer and others v Federal Republic of Germany [1996] ECR I-4845, paras 21-24.
2 See pages 98 to 100.
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monitor the reinsurance agreement entered into by Equitable in 1999", which was
particularly criticized both by Lord PENROSE1 and in the Baird report2 may be considered to
be a supervisory failure that "might be taken to constitute a serious breach for the purposes of
Francovich" (ES 33). A similar view is taken in WE 71 by the law firm who considered for
ELAS the merits of possible claims against the regulators: "We consider there is a potentially
arguable claim on the part of the policyholders for breach of the Third Life Directive, in
respect of one limited issue, namely the arguably excessive value ascribed to the reinsurance
treaty in the Society's technical provisions" (WE 71).
Where a Member State fails to transpose a Directive into national law, or an administrative
authority fails to apply it in practice, the second condition for liability mentioned above must
also be met. Hence, liability arises only where the result prescribed by the Directive entails
the grant of rights to individuals and it is possible to identify the content of those rights on the
basis of the provisions of the Directive. Whether this condition is fulfilled is a matter of
interpretation of Community law and therefore falls within the exclusive remit of the ECJ,
according to ES 3.
In this respect, ES 3 refers to Case C-222/02 Paul and Others v Bundesrepublik Deutschland.
In its judgment of 12 October 2004, the ECJ clarified some issues pertaining to the liability of
supervisory authorities in the banking sector under the EU harmonisation directives on
banking law. The Court held essentially that, although the Directives4 impose on the national
authorities a number of supervisory obligations, "neither Directive 94/19 on deposit
guarantee schemes nor any other banking harmonisation directives ... confer rights on
depositors against supervisory authorities in the event that their deposits are unavailable as a
result of defective supervision"(ES 35). It furthermore held that "a rule of national law which
provides that a supervisory authority must fulfil its functions only in the public interest and
which precludes individuals from claiming compensation for damage resulting from defective
supervision is compatible with the EU banking law Directives" (ES 36).
Thus, the judgment in Peter Paul suggests that the Community banking Directives do not
provide for an implied right to good supervision and reckons that liability of banking
regulators is primarily a matter for national law. "Given the similarities in the prudential
supervision of the banking and the insurance sector, it may be said that the judgment also
applies to the latter" (ES 37). However, ES 3 points out that this judgement "does not
preclude the possibility that the ECJ may derive individual rights on the basis of other, more
specific, provisions of Directives: Implied rights may ... arise ... by specifying in Community
1
WE 16.
WE 17.
3 Page 108.
4 Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes, First
Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws, regulations and administrative
provisions relating to the taking up and pursuit of the business of credit institutions (OJ 1977 L 322, p. 30); Council Directive
89/299/EEC of 17 April 1989 on the own funds of credit institutions (OJ 1989 L 124, p. 16); Second Council Directive
89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the
taking up and pursuit of the business of credit institutions and amending Directive 77/780 (OJ 1989 L 386, p. 1). These have
now been amended and codified in Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000
relating to the taking up and pursuit of the business of credit institutions (OJ 2000 L 126, p. 1).
5 Page 101.
6 Page 101.
7 Page 105.
2
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provisions the supervisory and monitoring obligations of national competent authorities and
the range of interests they are designed to benefit" (ES 31). Since the supervisory
requirements laid down in the Third Life Directive appear to lack this specificity, however, it
would be more than difficult for aggrieved ELAS policyholders to establish the second
condition for liability under Francovich.
Another recent judgment in a case brought by underwriting names at Lloyd’s against the UK
Government points into the same direction (see WE-FILE 24 and WE-FILE 25). They
claimed against Her Majesty's Government damages for losses incurred by the Names 'in
consequence' of the Government's failure to implement Insurance Directive 73/239/EEC2. The
claimants argued that, in failing to implement the Insurance Directive into domestic UK law,
they had not had the benefit of the results prescribed by the Directive relating to, amongst
other things, 'the conditions to which the authorisation of insurance undertakings at Lloyd's
was to be subject, and monitoring of the same; the classes of business such undertakings are
permitted to write; requirements as to the technical reserves and solvency margin of such
undertakings; and the verification of such requirements'.
The UK High Court found that the rights which the claimants argued that they were granted
by the Directive in fact amounted to a claim to the right to implementation of the Insurance
Directive. In contrast to this matter, Francovich and Brasserie du Pecheur assumed that the
Directive should have been but had not been transposed into national law and required that a
right could be identified which should necessarily have been granted to the claimant to
achieve the results required by the Directive. According to the judgment, the purpose of the
Insurance Directive was not to protect those who were regulated in the manner claimed by the
names, although different rights might be granted to insurers, such as the right to establish,
but to protect those to whom they supplied their services or products. Having regard to the
nature of the relevant provisions, the purpose of the Insurance Directive was to facilitate the
development of an open market in the provision of direct insurance and, in that context, to
harmonize existing national supervisory provisions. The High Court concluded that those
purposes had nothing to do with the complaint that the Lloyd's names sought to pursue and
therefore rejected the claim.
Finally, under Francovich, there must be a direct causal link between the breach of the
obligation resting on the State and the damage sustained by the injured party. According to ES
3, "the greatest obstacle [for action in damages based on Francovich to succeed] would be to
determine causation with any loss suffered by specific policyholders and the calculation of
damages" (ES 33).
c.) Action for damages under Articles 235 and 288(2) ECT
Article 288(2) ECT4 provides that in the case of non-contractual liability, the Community
shall, in accordance with the general principles common to the laws of the Member States,
1
Page 105.
Council Directive 73/239/EEC of July 24, 1973, on the coordination of laws, regulations and administrative provisions
relating to the taking-up and pursuit of the business of direct insurance other than life assurance, (OJ August 16, 1973,
L228/3-19).
3 Page 108.
4 Art. 235: “The Court of Justice shall have jurisdiction in disputes relating to compensation for damage provided for in the
second paragraph of Article 288.”
2
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make good any damage caused by its institutions or by its servants in the performance of their
duties. Where citizens, firms or Member States sustain damage by reason of fault committed
by European Community staff, legal action for damages may be filed at the Court of First
Instance (individuals and firms) or at the Court of Justice (Member States). This liability is
not specified and it has been a matter for the Court to interpret its ambit.
Accordingly, the following conditions must be satisfied before an award of damages can be
made:

There must be an unlawful act by a Community institution or by a member of its staff
in the exercise of his functions;

Actual harm must have been suffered;

There must be a causal link between the act of the Community Institution and the
damage sustained.
The Community cannot incur liability unless the institution concerned has manifestly and
gravely disregarded the limits to the exercise of its powers.1 A finding of an error which, in
analogous circumstances, an administrative authority exercising ordinary care and diligence
would not have committed will support the conclusion that the conduct of the Community
institution was unlawful in such a way as to render the Community liable.2
Aggrieved ELAS policyholders could lodge an action for damages under Article 288 based on
the argument that the Commission failed to properly fulfil the functions and duties conferred
to it by the Treaty in relation to monitoring the application of the EL law (i.e. the Third Life
Directive in the UK). However, such action appears to constitute only a theoretical possibility,
since the committee has found no conclusive evidence during this inquiry that that was the
case (see part II of the Report). However, even if the Commission had failed in its duty, it
would be questionable whether this failure would satisfy the condition of unlawfulness
referred to above. Moreover, one may take the view that the correct application of EU
legislation is primarily the responsibility of Member States. If the Member State is to be
considered primarily liable so that it would be reasonable for it rather than the Community to
pay compensation, then the applicant would have to pursue his remedy in the national courts
before the ECJ can further entertain his claim.3
3.
Coordination mechanisms at EU level
a.) FIN-NET
On 1 February 2001, the European Commission launched an out-of-court complaints network
for financial services to help businesses and consumers resolve disputes in the internal market
rapidly and efficiently by avoiding, where possible, lengthy and expensive legal action. This
1
See joined Cases C-104/89 and C-37/90 and Case C-352/98).
See Case T-178/98.
3 See Cases 5, 7, 13-24/66, Case 96/71).
2
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network, called FIN-NET, has been designed particularly to facilitate the out-of-court
resolution of consumer disputes when the service provider is established in an EU Member
State other than that where the consumer lives. Today the network brings together different
national schemes which either cover financial services in particular (e.g. banking and
insurance ombudsmen schemes) or handle consumer disputes in general. Participating
schemes have signed up to a voluntary Memorandum of Understanding (MoU)1. The
memorandum lays down detailed guidelines which should govern cooperation in cases of
cross-border complaints. However, its provisions are not legally binding on the Parties and it
does not therefore create any legal rights or obligations. FIN-NET complements the EEJ-NET
(European Extra-Judicial Network), which establishes a more general network of alternative
dispute resolution mechanisms (ADRs) notified to the Commission by Member States as
applying core principles contained in Commission Recommendation 98/257/EC.
Guidelines for cooperation are laid down in paragraph 6 of the MoU. According to paragraphs
6(1) and 6(2) of the MoU, the nearest scheme, i.e. the dispute settlement body for the
appropriate financial services sector in the consumer’s country of residence, "will give to the
consumer all the necessary and appropriate information about the complaints network and
about the competent scheme. Where appropriate, the nearest scheme will remind the
consumer of the advisability of first addressing complaints to the financial services provider
directly, since this is often a precondition which must be fulfilled before dispute settlement
bodies are able to take on board complaints. The nearest scheme will also warn the consumer
that there may be a time limit for submitting the complaint to the competent scheme and
possible time limits for any legal actions before the courts". Paragraph 6(3) stipulates that the
nearest scheme will either "transfer the complaint to the competent scheme or advise the
consumer to contact the competent scheme directly or, if the financial services supplier has
accepted the jurisdiction of the nearest scheme, or if the legal obligations of the nearest
scheme oblige it to do so, resolve the complaint itself within the limits of its rules of
procedure". "Once the competent scheme has received a cross-border complaint, it is its
responsibility to try to resolve the dispute between the service provider and the consumer
according to the rules laid down in its terms of reference and/or in its legal obligations, and
taking into account the Commission Recommendation No 98/257, including the applicable
law" (paragraph 6(4)). Finally paragraph 6(4) the MoU provides that these guidelines should
be regarded as the basic cooperation procedure in the network and that Parties can always
agree to an alternative method of cooperation in the interest of settling the dispute more
efficiently.
Paragraph 7 gives the consumer the possibility to choose the language in his dealings with the
competent scheme. He may either use the usual working language of the competent scheme or
otherwise deal with it in the language either of his contract with the financial services supplier
or in which he normally dealt with the financial services supplier.
Paragraph 8 lays down guidelines for the exchange of information both between participating
schemes and the Commission and between the competent scheme and the nearest scheme. As
regards the latter, paragraph 8(3) states the following: "Within the framework of its
possibilities the nearest scheme provides the competent scheme with information on
1
Memorandum of Understanding on a Cross-Border Out-of-Court Complaints Network for Financial Services in the
European Economic Area.
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appropriate mandatory consumer protection rules in force in the consumer’s country of
residence. The competent scheme should ask this information with a specific written request
which includes concrete questions concerning the particular case. Such requests for
information from other schemes will be replied to as swiftly as possible."
Mr DUCOULOMBIER from the European Commission's FIN-NET Secretariat in H9
explained the network's modus operandi in a nutshell: "The basic principle of the network is
quite simple. A consumer from country A has a dispute with a financial services provider
situated in country B. The principle of FIN-NET is that the consumer from country A only has
to be aware of the existence of his ombudsman in his own country of residence and would
then contact his own ombudsman in his own language. The ombudsman in the country of the
consumer – this ombudsman is referred to as the ‘nearest scheme’ – would then transfer the
consumer’s claim to his counterpart in country B, country B being the Member State in which
the financial services provider is located. So it is quite a simple system, which is intended to
assist consumers in finding the most appropriate scheme which will be responsible and able
to handle the consumer’s cross-border dispute. It means that the consumer does not have to
know languages and does not have to be informed about the existence of cross-border
resolution schemes in other Member States. He only has to know his own ombudsman." He
also described the Commission's role with regard to FIN-NET: "We as the Commission, are
the coordinators of this network, ... we organise the practical aspects ... we organise, convene
and host the meetings and issue short minutes of these meetings. [While] we act as both
secretary and coordinators, ... we do not intervene directly in the handling of cases." Between
600 and 800 cases are handled by FIN-NET each year, according to Mr DUCOULOMBIER.
He added that "no cases have been reported to us where an ombudsman has breached the
FIN-NET arrangements by not transferring a given case to the scheme responsible, so we
have every reason to believe that the arrangements which are in place are in fact working".
A number of other witnesses also made reference to FIN-NET in general. Mr MAXWELL
stated that FIN-NET is "looking at ways to help ... cooperate more effectively": He
emphasised that it is not based on a piece of European law but rather a voluntary cooperation
arrangement which "is developing, albeit slowly" (H4). Mr MERRIKS refers to FIN-NET in
WE 56: "The UK Financial Ombudsman Service is a founder-member of FIN-NET. ... The
FIN-NET memorandum of understanding provides for complaints to be handled by the
scheme in the Member State where the relevant branch of the financial institution was
situated. In WE 62, the current Irish Financial Services Ombudsman Mr MEADE stated the
following in relation to FIN-NET: "I am ... a signatory to the Memorandum of Understanding
on ... FIN-NET. The Ombudsman has an obligation under FIN-NET to ensure efficient
exchange of information between European ombudsmen. ... If I receive a complaint from an
Irish resident about a financial service provider regulated by a Regulatory Authority in
another EEA member state, which is comparable to the Financial Regulator here, I may refer
that complaint to the Ombudsman Scheme of the appropriate EEA member state to be dealt
with there. For example, if a complaint is received about a UK financial service provider
operating in Ireland but regulated by the Financial Services Authority in the UK, such a
complaint may be referred to the Financial Ombudsman Service in the UK for investigation
and vice versa."
Mr DUCOULOMBIER (H9) informed the committee that at present 49 ombudsman schemes
from 21 countries are members of FIN-NET. The network does not cover all EU Member
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States. This is, firstly, because "in some Members States ... there is no alternative redress
available" (Mr DUCOULOMBIER, H9). Secondly, certain schemes in other Member States
have decided not to join. "Maybe some of them thought they were not in a position to fulfil all
the criteria which are needed to be member of FIN-NET, one of them being independence
[from] the regulator" (Mr DUCOULOMBIER, H9). The Commission aims to fill these
geographic gaps by "encouraging" Member States to establish proper ADRs within their
respective territories. "We are working very hard to fill these [gaps] to make sure that we
cover all financial services in all countries" (Mr DUCOULOMBIER, H9). He pointed out
that there are currently no binding rules which oblige Member States to set up alternative
dispute resolution schemes.
Furthermore, Mr DUCOULOMBIER (H9) emphasised the heterogeneity of FIN-NET
members in terms of coverage, powers and definition of their respective jurisdictions. "Within
FIN-NET, there are Ombudsmen with different roles and responsibilities ..." For instance, in
the UK and Ireland, the ombudsman service has a horizontal, comprehensive coverage of all
financial services, whereas in other Member States there are different ombudsmen responsible
for the various financial services such as banking, insurance or mortgage. Secondly, the
powers vary according to Mr DUCOULOMBIER (H9): "Some of [the ombudsmen] have
almost court-like powers; they can render sentences which are binding on both parties. Some
cannot do this. Some will just try to find a bridge between the parties and ... propose an
amicable solution ... but they cannot impose anything. ..." Finally, Mr DUCOULOMBIER
stressed differences in the definitions of ombudsmen's jurisdiction. For instance, "in the UK
the Ombudsman has jurisdiction on cases which are located in the UK or for contracts which
were actually handled from the UK", whereas the German Insurance Ombudsman has
jurisdiction only over "complaints about contracts, which had been entered into with a
company which [has voluntarily become] a member of the association of German insurance
companies".
As regards the Equitable Life case, it should be noted that current financial ombudsman
schemes and their predecessors from the UK, Ireland and Germany are (were) parties to FINNET. As outlined under points IX 3. and 4. However, the existence of FIN-NET could not
prevent certain policyholders, in particular German policyholders who concluded a contract
with ELAS branch in Germany, not having access to either the UK Financial Ombudsman
Service or their domestic Insurance Ombudsman. As pointed out in ES 31, "the German
ombudsman scheme is based on a voluntary system so that the ombudsman only has
jurisdiction upon those undertakings which have voluntarily agreed to join the scheme. ... In a
situation where a UK company opens a branch in Germany and decides not to join the
German ombudsman scheme [like ELAS], a policyholder who purchased a policy through the
branch would be unable to bring a complaint for mis-selling an insurance product to the
German Ombudsman. The British ombudsman will also refuse to investigate the complaint
because the policy was not sold by a company established in the UK. As a result, the
policyholder is left out with no access to an out-of-court dispute settlement system" (ES 32). A
similar note was struck by Mr DUCOULOMBIER (H9), who referred to a specific case:
"There was one person based in Germany who had bought one of these Equitable Life
schemes and had lodged a complaint. Since she was in Germany, she first of all lodged a
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complaint with one of the many German ombudsmen. She was given a negative reply because
that German ombudsman did not have jurisdiction. So she then turned to the Financial
Services Ombudsman in the UK and was told that the Financial Services Ombudsman in the
UK ... had no jurisdiction in this case [either]. This was obviously quite disturbing for us
because it meant that our network had some gaps. This particular Equitable Life complaint
lodged by this particular person, who then turned to the Commission, helped us to identify
where we can improve our network".
Hence, according to Mr DUCOULOMBIER (H9), the differences between FIN-NET member
schemes in terms of competences and jurisdictions can lead to "situations in which a person
[is] not in a position to get proper redress anywhere". "We are aware of the problem and we
do not claim by any means to have full coverage and a perfect network. There are still some
gaps" (Mr DUCOULOMBIER). Similarly, ES 31 concludes that "the varying structures and
rules of jurisdiction of the national out-of-court systems may create loopholes that place
cross-border consumers of financial products at a disadvantage vis-à-vis domestic
consumers". Mr MERRICKS strikes a similar note in WE 56: "It is noticeable that there are a
number of gaps in provision of redress schemes in the different Member States. ..."
Mr MEADE in WE 68 expresses the opinion that "FIN-NET is a very useful method for
exchanging information and for ensuring that complaints can be dealt with on a Europeanwide basis", but that it would "[suffer] from the situation that unlike in Ireland, and in the UK
most of the Schemes are voluntary and therefore do not have the statutory powers of
enforcement which the Irish and UK Schemes have".
"We are determined to address these gaps. They are unacceptable and it is unacceptable that
there are situations in which the consumer is not getting out-of-court redress in financial
services", said Mr DUCOULOMBIER (H9). Commissioner McCREEVY confirmed that "we
are ... further developing the FIN-NET system" (H8). In concrete terms, the Commission is
currently preparing a "questionnaire, which we will address to the Member States with a view
to encouraging them to ensure that, within their respective territories, there are proper
alternative dispute resolution schemes for financial services so that there will be no gaps, at
least geographically speaking, between the Member States" (Mr DUCOULOMBIER, H9).
This is confirmed by Mr MERRICKS' statement in WE 56: "Very recently, FIN-NET has
asked the Commission to issue a questionnaire to national regulators about the identity and
coverage of their local financial out-of court schemes. The intention is that the information
gathered may encourage national regulatory bodies to fill gaps in the network – by
establishing new or improving existing schemes." Mr DUCOULOMBIER (H9) stated
furthermore that in the future the Commission intends to give FIN-NET a "much more
prominent role in assisting the Commission to shape its policy", since "they are privileged
observers of the financial services realities from the consumers' angle" and "[help] us to
identify where there are problems".
ES 3 concludes in relation to FIN-NET as follows: "There is no doubt that the FIN-NET
constitutes an effective mechanism to enhance the protection of consumers’ interests relating
to cross-border shopping of financial products, but it is not problem-free. Work still needs to
be done at European level to ensure that the interests of consumers who engage in crossborder transactions are protected effectively."
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In summary, there appears to be consensus among witnesses that FIN-NET is a potentially
useful network, which may help to direct consumers to the scheme which is competent for
dealing with their complaint in cross-border situations. However, FIN-NET is of no relevance
when none of its member schemes has jurisdiction over a particular complaint. Evidence
presented to the committee has revealed that the current differences between FIN-NET
member schemes in terms of definitions of jurisdictions have lead to such situations. For
instance, complaints by German policyholders, who contracted with ELAS branch in
Germany, fell outside the jurisdiction of both the German and the UK ombudsman.
Furthermore, in some Member States, ombudsmen do not have sufficient powers to
adjudicate; in others, dispute resolution schemes do not exist or they have not become
members of FIN-NET. Overall, evidence proves that there are significant gaps within the
FIN-NET system. The situation in which German ELAS policyholders found themselves is
therefore not exceptional and similar situations may (and are likely to) arise in the future.
These gaps in consumer protection are unacceptable in an internal market, which is
characterised by rapidly increasing volumes of financial services provided across borders.
Consumers must benefit from the same level of protection through access to out-of-court
redress schemes irrespective of whether they purchase financial products from domestic or
foreign providers, not least because cross-border problems, such as those which have arisen in
the context of Equitable Life undermine consumer confidence in Europe's financial services
market. The committee notes that the Commission is beginning to address the issue. However,
more needs to be done to rectify the imbalance between hard law which makes it possible for
financial services companies to trade across Europe on the one hand and soft instruments
which intend to create a system of cross-border redress schemes on the other.
In this regard and given the fact that legal routes are often too complex and expensive to be
pursued by ordinary citizens, it seems appropriate to envisage EU legislation with binding
measures that would oblige Member States to ensure that there are proper statutory alternative
dispute resolution schemes within their territories. The jurisdiction of these schemes should be
co-terminous with the scope of application of the rules to which the complaint relates. Since
the application of conduct of business rules under the Third Life Directive falls within the
responsibility of the host Member States, ombudsmen dealing with such complaints should be
responsible for all contracts concluded within their territory, irrespective of whether they
involve a foreign or a domestic company.
b.) CEIOPS
The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) previously called the 'European Conference of Insurance Supervisors' - was established
pursuant to Decision 2004/6/EC of 5 November 2003 and began its operations on
28 May 2004. CEIOPS is composed of high-level representatives from the insurance and
occupational pensions' supervisory authorities of the EU Member States.1 CEIOPS performs
the functions of the Level 3 Committee for the insurance and occupational pensions sectors.
1
The authorities of the European Economic Area Member States (Norway, Iceland and Liechtenstein) and EU candidate
countries, as well as the European Commission, participate in CEIOPS as observers.
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This role involves providing advice to the Commission on the drafting of implementation
measures for framework directives and regulations on insurance and occupational pensions
and establishing supervisory standards, recommendations and guidelines to enhance
convergent and effective application of the regulations and to facilitate cooperation between
national supervisors.
Mr BJERRE-NIELSEN, Chairman of CEOPS, told the committee in H7 that CEIOPS's main
focus has rather been on prudential matters but that "our mission naturally includes
supervisory concerns for consumer protection and redress". He pointed out that the protection
of policyholders regarding complaints against insurance providers was a complex issue for
CEIOPS: "Consumer rights and remedies are traditionally matters primarily for Member
States. They tend not to be EU-wide. Variations in jurisdiction, national authorities and
legitimate consumer expectations across the EU, are considerable. Sometimes CEIOPS
members have no role provided for them. Often another national body has, even exclusively.
Harmonised action is difficult, where it is permitted nationally at all. Nevertheless, generally
speaking, where CEIOPS members can combine their efforts, they will do so, as I have
outlined. CEIOPS recognises that there is more to do. Our work is by its very nature ongoing
and growing. We fully intend to go into greater depth on consumer complaints processes
across the EU" (H7).
When asked about the relationship between FIN-NET and CEIOPS, Mr BJERRE-NIELSEN
stated that "one of the many differences ... is that some of the CEIOPS members do not deal
with contractual complaints – if I may use that expression" (H7). "We are responsible for
solvency matters, prudential matters and [conduct of] business ... matters, rather than for
specific complaints. So the best answer I can give you is that of course we are aware that
FIN-NET is there, but due to our preoccupation with Solvency II we have not spent much time
on it. But we will come back to that at a later stage" (Mr BJERRE-NIELSEN, H7).
XI.
The case for a European class action lawsuit
As became apparent in the course of the committee's investigation, the costs and risks
involved with litigation by individuals against financial services providers are in many cases
disproportionate, when compared to the relatively small amounts of damage to be recovered.
As Mr ALEXANDER stated in WS "many investors and consumers, when they lose money, it
may not be in absolute terms a great amount as far as going and getting a lawyer involved".
Furthermore, he indicated that "in financial services you have consumers who have been sold
investment products in a similar way, or ... there was a similar type of failing in the sales
process" (WS2). Thus, alleged mis-selling by financial services providers often affect large
numbers of consumers who have been sold similar products in similar ways, and therefore
have similar legal claims. Mr ALEXANDER considered that "the class action concept is
particularly appropriate in financial services because it does allow consumers and investors
to pool their claims together, if they are similar regarding their factual content and legal
claim. (WS2)"
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A right to collective legal action on an EU-wide basis would not only serve to better protect
policyholders, including cross-border customers. The availability of class action would
empower the consumer in a way that would furthermore create an additional regulatory
mechanism that helps ensuring compliance by financial services providers with applicable
law.
In Mr ALEXANDER's view "policyholders should be able to rely on both a system of
collective protection which allows the regulator to bring claims on behalf of policyholders
against firms or persons and a collective right of legal action to be exercised by a class or
group against firms or persons in breach of EU financial services law" (WE-FILE 31).
According to him, EU law should be amended to allow EU investors or non-EU
purchasers/investors in EU financial services products to bring a type of group or class action
in member state courts to recover losses arising from violations of EU financial services
legislation. Mr ALEXANDER pointed out the need to establish uniform procedural
requirements for class action lawsuits across the EU: "I think you would want to make sure
[that] procedurally it could be done in a way where it is somewhat uniform on an EU basis;
otherwise one Member State might be seen as the class action haven, where all the class
actions are brought" (WS 2). However, he points out that it would be "a major challenge
politically for member states to accept changes to their civil court rules [although] it would
only apply to claims based on EU law rights" (WE-FILE 311).
Mr ALEXANDER stressed that "US-style class action law suits have attracted much negative
attention in the British and European media. He warned that class action in an EU context
should be designed in a way that avoids "extreme abuses" as they appear to occur in the US:
"In the US it is so easy for lawyers to certify a class and just get a few named representatives
to cut a deal with a defendant bank [so] that everyone else doesn't have much input. ... So
there are problems in the US system which you'd want to be careful to avoid" (WS2). Hence,
"EU policymakers should examine the procedural mechanisms in place in EU jurisdictions
and propose a class action remedy that can certify the class for a civil action for losses
arising from breach of EU financial services legislation based on the broader requirement
under English law that allows for a group action if the claimants have ‘common or related
issues of fact or law’" (WE-FILE 312).
The committee agrees that it would be necessary for the possible advantages and
disadvantages of introducing a legal framework with uniform procedural requirements for
European cross-border class action lawsuits in financial services to be thoroughly examined.
XII.
The need to compensate Equitable Life victims
It should be recalled that Equitable Life victims are not investors willing to take risks for the
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prospect of attractive returns. Rather they prudently set aside money for their retirement with
a highly reputable Society, which led them to believe that their investment was absolutely
safe. These policyholders were entitled to expect from the UK Government thorough and
rigorous supervision of all financial services providers that offer such sensitive products as
life assurance and private pensions, including Equitable Life. This holds true especially in the
light of growing tendencies among European governments based on population trends to urge
their citizens not to rely on state pensions but to purchase private schemes instead .
It is one of the major objectives of the Third Life Directive to ensure "adequate protection"1
of policyholders through rigorous supervision. As was shown in Parts II and III of this report,
the UK regulators failed in a number of respects to supervise and monitor the financial health
of Equitable Life, including its state of solvency, the establishment of adequate technical
provisions and the covering of those provisions by matching assets, according to the
requirements laid down in the Third Life Directive. Had the UK regulators correctly applied
the provisions of the Directive, they would most likely have achieved its objective to 'ensure
adequate protection of policyholders' and thus have avoided the crisis at Equitable Life, which
caused substantial losses to policyholders.
As this part of the report illustrates, there have been no adequate remedies available for
aggrieved policyholders to recuperate their losses either under UK or EU law. As regards EU
law, it is questionable, given the judgments in comparable cases, if an action in damages
against the UK under Francovich would be successful. Likewise, it would be difficult for
policyholders successfully to pursue their claims against the regulator under the UK legal
regime for regulatory liability because they would have to prove misfeasance. On the other
hand, the current investigation by the UK Parliamentary Ombudsman into whether individuals
were caused injustice through maladministration on the part of UK prudential regulators could
result in a recommendation to pay compensation. However, the Ombudsman's remit is limited
in terms of both the time period and regulatory authorities covered. In particular, her terms of
reference exclude the question of whether the UK regulatory regime at the time met the
requirements of EU law.
In light of the above, the committee considers it appropriate to recommend strongly to the UK
Government to devise an appropriate scheme with a view to provide full compensation for
Equitable Life victims both within the UK and abroad for its failure to protect policyholders
in accordance with EU legislation. In the absence of viable alternatives, the committee sees it
as an obligation of the UK Government to assume responsibility for its failures and provide
redress for citizens' grievances. The committee believes that this must happen now, in order to
put an end to this affair and secure relief for the many victims.
1
See for instance Recitals 2 and 4 of the Directive.
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Conclusions PART IV - REMEDIES
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PART IV - REMEDIES
Introduction
1.
Overall, about 1.5 million policyholders were affected by the events at Equitable Life.
The vast majority of them were UK residents. Nevertheless, a significant number of
policyholders from 14 other EU Member States were affected, in particular
approximately 8 000 Irish and 4 000 German citizens. Thus, a large number of European
citizens have suffered as a result of the crisis at Equitable Life.
2.
The written and oral presentations made to the committee1 suggest that the crisis at ELAS
has caused financial hardship to many individual pensioners and savers. Evidence also
shows that many policyholders have suffered considerable worry and distress in relation
to issues surrounding the availability of redress and access to justice, in addition to their
financial losses.
3.
The collective losses incurred by policyholders cannot be quantified precisely on the
basis of submissions made to the committee.2 The cut in policy values intimated on 16
July 2001 equalled around £4 billion. However, there has been conflicting evidence as to
which part of the cut can be attributed to mismanagement of the Society and which part
was rather a consequence of external factors, such as the weak performance of financial
markets at the time. However, the Society's practice of paying excessive bonuses
throughout the 1990s, together with the cost of paying for GAR appear to have been
major causes for the reduction in policy values. In the aftermath of the crisis, the
investment options of ELAS were severely constrained with further financial
repercussions for the policyholders.
4.
Statements made to the committee3 have highlighted the fact that various classes of
policyholders were affected by the crisis to differing degrees. However, it appears that
several groups were particularly disadvantaged: firstly those non-GAR policyholders who
joined between the late 1990s and 2000, as they had not previously benefited from the
Society's excessive bonus allocation; secondly, with-profits annuitants who suffered
severe reductions in their annuity payments without having the possibility to transfer
policies to another provider; thirdly, policyholders from Member States other than the
United Kingdom, such as Ireland and Germany, were put in a particularly difficult
position, irrespective of the terms of their policy with ELAS.
5.
Statements made to the committee have shown that many of the victims of the ELAS
crisis had great difficulty in knowing what route to take or who to apply to in trying to
obtain information, make a complaint and obtain redress. Many were literally passed
from pillar to post by various agencies. Others clearly had huge expectations of
alternative dispute resolution (ADR) systems when they might have been better advised
1
See Part IV, Section II points 1 and 3.
2
See Part IV, Section II point 2.
See Part IV, Section II point 3.
3
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to have pursued a claim through the traditional courts, if they could have afforded the
financial cost. In short, the material presented to the committee shows a pattern of
confusion and much inequality of treatment. Subsequent conclusions and
recommendations on the status of claims and adequacy of remedies available to
policyholders and access to judicial and non-judicial remedies are now examined in turn.
I. Redress through the courts
(a) Litigation by ELAS
6.
Equitable Life's attempt to recover losses by litigation against its former directors and
auditors did not result in redress for policyholders. This inability of even a well funded
litigant to be able to pursue a claim to its conclusion highlights the high costs and the
uncertainty generated by recourse to judicial means of redress in the UK.
(b) Civil Proceedings against ELAS
7.
The launch of court proceedings against ELAS (under Section 62 of the Financial
Services Act 1986 or for misrepresentation or for negligent advice) was, in theory, a
possible route for aggrieved policyholders to obtain redress. However, in practice, as
submissions to the committee1 suggest, only a few affluent policyholders took this route
or threatened through legal advisors to do so and consequently reached settlements with
the Society prior to trial under strict confidentiality clauses. The high costs and risks
under the UK legal system prevented the average policyholder from suing the Society,
and these consequently had to rely on the FOS as the only possible route to redress. The
committee is of the opinion that this is clearly unfair.
(c) Proceedings against the supervisory authorities
8.
Expert advice2 commissioned by the committee indicates that under UK law, unlike in
most other EU countries, a supervisory authority may not be held liable in negligence but
only under the tort of misfeasance in public office, requiring an element of bad faith. This
element would be satisfied only where the authority had exercised its powers unlawfully,
specifically intending to injure the plaintiff, or with reckless indifference to the possibility
of such injury. Available material suggests that such requirements were not made out in
the case of ELAS, with the consequence that there are serious doubts as to whether
aggrieved policyholders would be successful in holding the regulatory authorities liable
for their losses under UK law.
(d) Situation and treatment of policyholders from other Member States
9.
1
2
The committee notes the doubts expressed by the Commission concerning the clarity of
the concepts of freedom to provide services, the liability of regulators for negligence and
See Part IV, Section VI point 2.c.
See Part IV, Section VII point 2.
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the "general good" and agrees that differences of interpretation concerning such concepts
"seriously undermine the workings of the machinery set up by the Third Life Directives".1
10. Equitable Life operated branches in Ireland (from 1991 to 2001) and Germany (from
1992 to 2001) and sold its products to approximately 8000 Irish and 4000 German
customers. Some submissions2 have suggested that Equitable Life made particular efforts
to attract Irish and German customers in the late 1990s and even more so in 2000, at a
time when its financial situation had become critical and, in the light of the ruling of the
Court of Appeal in January 2000, was very likely to deteriorate further due to GAR
liabilities. The Society's doubtful advertisement campaign in Germany, which was
criticised in the course of the hearings by the representative of the Swiss authorities as
unthinkable in his own regulatory environment3, and the launch of its 'European fund' in
Ireland, both in 2000, illustrate this.
11. By analogy with Equitable Life's mis-selling in the UK, there are compelling accounts4
suggesting that the Society also misled a number of Irish and German policyholders and
prospective customers by failing to advise them the GAR risk and by falsely claiming
that the 'with-profits' fund was smoothing out fluctuations in earnings and asset values. In
addition to this, further statements were made to the committee5 to the effect that the
Society falsely informed certain Irish customers that they had bought, or would be
buying, into a separate Irish fund which would be ring-fenced and thus not affected by
liabilities arising within the UK fund. The Society continued to do so after the ruling of
the Court of Appeal in January 2000 and claimed on several occasions that the ruling
would not impact on Irish and other international policies.
12. The dissatisfaction by German policyholders with the Society's recent decision no longer
to publish documents relating to the Annual General Meeting as well as reports and
accounts in German has been made apparent to the committee.6 This decision clearly puts
German policyholders in an even more unfavourable position than UK policyholders and
further highlights the need for robust information requirements before the contract is
concluded, but also throughout its performance.
13. The committee finds it regrettable that neither the Irish Department of Enterprise, Trade
and Employment (DETE), nor the Irish Financial Services Regulatory Authority
(IFSRA), assumes responsibility for the grossly inadequate actions undertaken by the
Irish regulator in relation to Equitable Life prior to 2003, and that IFSRA remains outside
the remit of the Irish Freedom of Information legislation.
14. There should always be a fully liable chain of responsibility for regulation. The chain of
accountability should not be broken including when there is reform of regulatory
procedures/bodies.
1
Interpretative Communication on Freedom to provide services and the general good in the insurance sector, 2000/C 43/03,
16 February 2000.
2 See Part IV, Section IX points 2.b and 2.d.
3 See Part IV, Section IX point 3.a.
4 See Part IV, Section IX point 2.c.
5 See Part IV, Section IX point 2.c.
6 See Part IV, Section IX point 2.e.
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15. Available material1 indicates that there were no conduct of business rules specific to life
insurance in place at the time of the ELAS crisis in Ireland, other than the information
requirements required by the Life Directives. The Irish regulator did not notify conduct of
business rules to the UK regulator until July 2002. Likewise, the German regulator
appears to have communicated German rules on the conduct of business directly to EC
insurance undertakings operating in its territory in 1996 and 2000, including Equitable
Life. With the exception of one intervention of the German regulator against a misleading
advertising campaign, neither the Irish nor the German authorities have taken any
particular action with regard to specifically enforcing any conduct of business rules in
relation to Equitable Life.
16. The committee concludes that both Irish and German regulators have pursued an
unjustifiably passive approach to the conduct of business regulation in respect of
Equitable Life and failed to make full use of the powers conferred to them in this respect
by the Third Life Directive.
17. In light of available material2, the committee believes that the Third Life Directive lacks
clarity in defining the powers, roles and responsibilities of home and host Member State
authorities. This lack of clarity is problematic both from the perspective of firms wanting
to operate in a single market who face uncertainty with regard to the applicable rules and,
to an even greater degree, for consumers who are likely to be unaware of the rules
intended to protect them and moreover do not know which authority is competent to
enforce these rules and deal with corresponding complaints. Furthermore, the committee
notes that consumers in cross-border situations are often faced with the task of reaching a
decision as to whether their complaint relates to financial supervision or some other
aspect of regulation, which is a complex distinction to make.
18. The Equitable Life case further illustrates the close links and overlaps, in certain areas,
between financial supervision and conduct of business issues. The division of
competences between home and host State may thus lead to problematic situations, in
which the host State conduct of business regulator lacks financial information he would
need (which only the prudential home State regulator has) to assess whether the
statements made and information given by a financial services provider are accurate or
otherwise insufficient/misleading and hence should give rise to regulatory intervention.
The fact that the FSA never deemed it necessary to alert the host State regulators of the
critical state of Equitable Life's finances constituted an important reason for the lack of
regulatory action by German and Irish conduct of business regulators.
19. Both Irish and German regulators have responded to numerous queries and requests for
information from policyholders. Material made available to the committee3 indicates that
both regulators sought to obtain information from the UK authorities and passed this
information on to policyholders in their respective Member States.
1
See Part IV, Section IX point 3.a.
See also Part IV, Section IX point 3.a.
3 See Part IV, Section IX point 3.a.
2
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20. However, statements made to the committee1 make it clear that Irish and German
policyholders were not able to obtain redress for their grievances through their respective
national financial regulators. The Irish authority did not have the power to adjudicate on
complaints. The German regulator rejected most complaints it received because it
considered that they concerned matters of financial supervision, for which it was not
responsible. The two complaints which were upheld by the German regulator were not
related to Equitable Life's crisis.
21. Many statements and submissions to the committee2 suggest that the overlaps and grey
areas between financial and conduct of business supervision allowed home and host state
authorities to shift responsibility from one to another for dealing with complaints. For
instance, neither the German nor the UK regulators regarded themselves as competent for
dealing with a particular complaint3, which was interpreted by one as concerning a
financial supervision issue, while the other considered the same complaint to be related to
conduct of business. The committee believes that these gaps in cross-border redress are
unacceptable.
22. The committee believes that discrimination on the basis of residence concerning the
judicial and non-judicial investigation of regulatory failure constitutes a restriction on the
freedom to receive services, as guaranteed by the Treaty. Furthermore, such
discrimination in relation to redress is so closely related to the freedom to receive and
provide life insurance services and to establish branches to provide such services as
guaranteed by the Treaty, that it must be contrary to Articles 43 and 49 of the EC Treaty.
23. Policyholders who contracted with one of the Society's EU branches may bring claims
against Equitable Life before the court of their respective home state under domestic law
according to Regulation (EC) No 44/2001 and Article 32 of the consolidated Life
Directive. Whilst the committee has not had any notice of cases brought against Equitable
Life before Irish courts4, it is aware that one such case is currently pending before a
German regional court. The committee considers that the jurisdiction of domestic courts
brings with it some advantages for the affected policyholders. However, there are certain
doubts as to whether domestic courts would always have the capacity to deal adequately
with cases, such as Equitable Life, where the evidence to be considered involves complex
actuarial and regulatory issues strongly linked to another Member State which, moreover,
is only likely to be available in translation from a foreign language. In addition, there may
well be complex arguments around the issue of applicable law, but also in relation to the
interaction between private international law and internal market rules.
24. The general conclusion, which the committee made in connection with UK policyholders,
that litigation is not a viable alternative to the average policyholder due to potentially
high costs and risks, also applies, in general terms, to non-UK policyholders, although the
degree of risk to which litigants are exposed may vary depending on their respective
domestic legal systems and the costs of accessing the same, including the availability of
any legal aid schemes.
1
See Part IV, Section IX point 3.a.
See Part IV..
3 See Part IV, Section IX point 3.a.
4 See Part IV, Section IX point 5.
2
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(e) Remedies under Community law
25. The committee takes note of the case-law and institutional practice according to which
the Commission is prevented from bringing infringement proceedings against Member
States for past breaches of Community law which have since been remedied. The
committee insists, however, that such a position creates an unfortunate lacuna in the
judicial protection of individuals who are victims of violations of Community law by a
Member State, which may only become apparent several years after the breach. The
committee believes that the possibility of condemning Member States for past breaches,
in addition to being of assistance to victims considering possible actions before national
courts, would create a strong incentive for Member States to implement EU legislation
correctly and on time. The committee also notes that the Commission has the power to
investigate past breaches of Community law by undertakings in breach of certain Treaty
rules where there is a legitimate interest in doing so.1
26. Conversely, such a limitation on the powers of the Commission highlights the vital
importance of the citizen's right of petition and the Parliament's right of inquiry in such
situations. The Commission, in response to complaints it received from Equitable Life
policyholders, argued that it could not investigate the content and application of the
former regulatory regime in the UK, which had since been replaced. Parliament, by
contrast, decided that the matters raised by the petitioners were sufficiently important to
warrant an in-depth investigation and the consequent setting up of a Committee of
Inquiry. Although Parliament itself does not have the power to award compensation to
petitioners, it may make any recommendations it deems appropriate in this respect.
27. The Third Life Directive does not itself provide for any remedies and does not deal with,
or make any reference to, the question of compensation. Such questions must therefore be
determined according to general principles of Community law, including the duty of loyal
cooperation enshrined in Article 10 of the EC Treaty.
28. The UK may in principle be held liable before national courts in damages to Equitable
Life policyholders who have suffered loss as a result of the UK's failure to comply with
the provisions of the 3LD. Certain failures by the UK regulators2 may in themselves
amount to sufficiently serious breaches for the purposes of state liability under
Community law. Moreover, it is clear that the cumulative effect of breaches by UK
authorities may collectively amount to grave and manifest disregard for the limits
imposed on their discretion.
II. Non-judicial means of redress
(a) Complaints to the FSA and various inquiries preceding EQUI
1
Recital 11 and Article 7(1) of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules
on competition laid down in Articles 81 and 82 of the Treaty (OJ L 1, 4.1.2003, p. 1).
2 See Part IV, Section X point 2.b.
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29. Statements made to the committee1 indicate that neither complaints submitted by
policyholders to the FSA after the crisis, nor any of the subsequent official inquiries have
resulted in redress. Indeed, matters of liability and possible redress were either not
addressed or explicitly excluded from the terms of reference of those inquiries.
30. Material made available to the committee2 does not support allegations of a failure by the
FSA to deal appropriately with policyholders from Ireland and Germany approaching
them with complaints or requests for information. The cases presented to the committee,
in which the FSA refused to deal with particular aspects of complaints, concerned
conduct of business matters, for which the home State regulators were primarily
responsible under the Third Life Directive. However, as was the case with UK
policyholders, the representations made by German and Irish policyholders to the FSA
did not result in redress.
(a) Financial Services Compensation Scheme
31. The UK Financial Services Compensation Scheme was not available to Equitable Life
victims, since the company was never declared insolvent.
32. The committee notes, however, that access to the compensation fund is available only to
investors having signed policies with an undertaking in the UK or, if the investor
contracted with subsidiaries in other Member States, where the risk or commitment is
situated in the UK. The committee considers that the second condition amounts to
discrimination on the basis of residence which is incompatible with Community law.
(b) UK Financial Ombudsman
33. Several thousand policyholders lodged complaints about Equitable Life with the
Financial Ombudsman Service (FOS)3, which upheld several hundred of those complaints
with awards of compensation.
34. Statements made to the committee4 suggest that the FOS has not ensured in all cases that
the amounts of compensation were calculated in a sufficiently transparent manner, so as
to be verifiable by complainants who believed that the amounts were insufficient.
Numerous statements5 suggested that, in dealing with complaints, the FOS based its
decisions not only on the respective merits of each complaint but also on the impact of its
individual decisions on remaining policyholders of the mutual fund.
35. The FOS's refusal to consider on their merits complaints based on the findings of Lord
Penrose revealed a significant gap in judicial protection and made apparent the
limitations of FOS in dealing with complaints, when his adjudication had possible
regulatory implications. The committee also heard submissions6 to the effect that the FOS
1
See Part IV, Section III.
See Part IV, Section IX point 4.a.
3 See Part IV, Section IX point 4.a.
4 See Part IV, Section VI point 1.c.
5 See Part IV, Section VI point 1.b.
6 See Part IV, Section VI point 1.c.
2
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did not take this decision independently from the regulatory authorities. As a
consequence of the FOS's decision, a whole category of complainants who had
potentially valid claims in relation to over-bonusing was left without alternative to costly
and risky litigation.
36. A large number of submissions made to the committee1 indicate that the treatment of
certain complaints to the FOS suffered from excessive delays. In some cases, this resulted
in complainants being time-barred from taking subsequent legal action. The committee
finds such a consequence unacceptable.
37 Overall, the committee believes that the FOS did not constitute an appropriate means of
redress for the grievances of a vast majority of Equitable Life policyholders who suffered
damage as a consequence of Equitable Life's crisis.
38. The committee is concerned that the expectation on the part of citizens that ombudsman
schemes, such as the FOS, constitute an effective and viable alternative to judicial redress
does not always match the reality of what such systems actually deliver.
(c) Compromise Scheme
39. Submissions made to the committee suggest that the primary aim of the Compromise
Scheme of arrangement was to remove legal uncertainties and liabilities from Equitable
Life and thereby stabilise the fund. The scheme, however, did not improve the situation
of policyholders because the uplifts in policy values granted to non-GAR policyholders,
who in exchange waived their right to pursue claims, were offset by cuts, which occurred
soon thereafter.
40. Numerous accounts2 suggest that the Society may have been aware at the time it
proposed the scheme that the uplifts in policy values could not be sustained under normal
circumstances. However, it failed to communicate this to policyholders, who may well
have voted against the scheme, had they been made aware of the full state of the Society's
finances.3
41. The committee concludes that the practical result of the scheme was to remove from all
remaining policyholders the right to pursue claims against the Society, while not
preventing their losses from increasing.
42. Several accounts4 suggest furthermore that the Society itself dealt with a number of
complaints by non-GAR policyholders who were not covered by the compromise
agreement, either individually or through policy reviews, and offered them some
compensation. It appears that a majority of policyholders accepted the offers, although
the amounts seem to have fallen short of reflecting the real losses suffered as a
consequence of the crisis at Equitable Life.
1
See Part IV, Section VI point 1.c.
See Part IV, Section IV point 2.
3 See Part IV, Section IV point 2.
4 See Part IV, Section IV point 3 (as regards the losses suffered, see Section II point 2).
2
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(d) UK Parliamentary Ombudsman
43. The UK Parliamentary Ombudsman's investigation into whether individuals were caused
injustice through maladministration on the part of those charged with the regulation of
Equitable Life is complementary to the European Parliament's own inquiry.
44. It is not a part of this Committee's mandate to attribute individual responsibility or
liability amongst those involved in the UK, Irish or German Government, or regulatory
authorities; this should be a matter for the UK Parliamentary Ombudsman and any
subsequent parliamentary or legal proceedings in the respective Member States.
45. Following clarification, the UK Parliamentary Ombudsman's investigation covers the
position of all international policyholders who claim to have suffered injustice as a result
of maladministration in the prudential regulation of Equitable Life and any findings and
recommendations made will also address the position of such policyholders. The
Ombudsman has the possibility to recommend to the UK Government the payment of
compensation.
(e) Policyholders from other Member States: Access to Ombudsman schemes in the UK and
in their home State.
46. It appears1 that the Insurance Ombudsman of Ireland (IOI) Scheme, which was in place at
the time of Equitable Life's crisis but has meanwhile been replaced by the Financial
Services Ombudsman (FSO) received 79 complaints by Irish policyholders, of which 15
were upheld. It appears that there has been some confusion among policyholders,
ombudsmen and ELAS about whether the Irish IOI or the UK FOS would be competent
to deal with certain complaints. No information could be obtained from the IOI as to
whether the 15 cases decided in favour of the complainant concerned the main misselling allegations identified by the committee. Overall, material available to the
committee suggests that the former IOI scheme did not constitute an adequate avenue to
redress for the approximately 4000 Irish ELAS policyholders. It should be noted,
however, that the situation has since improved with the establishment of the Financial
Services Ombudsman; this begs the question why this service was not established at an
earlier stage.
47. There was no Ombudsman scheme for insurance in place in Germany prior to October
2001. Furthermore, the Versicherungsombudsmann, established in October 2001, is not
competent to deal with complaints about Equitable Life because the Society has never
been a member of the scheme and the ombudsman’s jurisdiction is contingent on such
membership.
48. In principle, Equitable Life policyholders who purchased policies from the Society's
branches in Ireland, Germany and other EU Member States did not have access to the UK
Financial Ombudsman Service because the FOS's jurisdiction does not cover complaints
about services provided by UK firms from branches in other Member States.
1
See Part IV, Section IX point 3.b.
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49. The committee is aware1, however, that a few complaints from Irish policyholders were
nevertheless treated by the FOS. It remains unclear on which basis exactly the FOS
considered that complaints fell under its jurisdiction. The committee is inclined to believe
that there was confusion at the time among policyholders, regulatory authorities and the
FOS itself about whether certain complaints by Irish policyholders would fall under the
FOS's jurisdiction. It is remarkable that, by contrast, the FOS appears not to have
accepted any complaints from policyholders from other Member States, including
Germany.
50. Overall, it appears2 that non-UK policyholders did not have access to appropriate nonjudicial redress schemes in the UK. Therefore, they find themselves in an even more
unfavourable position than UK policyholders. This lack of clarity about whom, if anyone,
policyholders could address even led one non-UK national to submit a complaint to the
European Ombudsman, who had no standing in the matter.
(f) FIN-NET
51. The committee notes3 significant gaps within the FIN-NET system, which is
fundamentally a voluntary system. These gaps arise firstly from the fact that the network,
even after several years of operation, does not cover all EU Member States and financial
services. Secondly, the powers and competences of those ADR schemes which are
members of FIN-NET vary considerably. Finally, criteria used to determine the
jurisdiction of different FIN-NET members are diverse and do not always interact to form
a coherent system. For example, FIN-NET was of no assistance to German Equitable
policyholders whose complaints fell outside the membership-based jurisdiction of the
German and the territorial jurisdiction of the UK Ombudsman. In light of these gaps, it is
probable that other similar cross border situations will arise, or may have arisen, in which
there is a total lack of access to out-of-court dispute settlement. The committee notes that
the ELAS crisis has helped the Commission identify such problems within FIN-NET and
attempt to find satisfactory solutions for the future.
52. The committee considers such gaps in access to consumer redress wholly unacceptable in
an internal market characterised by rapidly increasing volumes of financial services
provided across borders. Problems such as those which have arisen in the context of
Equitable Life undermine consumer confidence in Europe's financial services market.
Consumers must benefit from the same level of protection through access to out-of-court
redress schemes, irrespective of whether they purchase financial products from domestic
or foreign providers. Discrepancies in this respect hinder the opening up of cross-border
retail, which is arguably the key to unlocking the full potential of the internal market.
53. The committee considers it wholly unsatisfactory that, while the Union has opened up its
markets in financial services using black letter law, be it through Treaty principles or
1
See Part IV, Section IX point 4.b.
See Part IV, Section IX point 4.
3 See Part IV, Section X point 3.a.
2
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secondary legislation, issues related to consumer redress have been addressed with mere
soft law instruments, such as Recommendations and Memoranda of Understanding.1
1
See Commission Recommendation 98/257/EC of 30 March 1998 on the principles applicable to the bodies responsible for
out-of-court settlement of consumer disputes (OJ L 115, 17.4.1998, p. 31); Commission Recommendation 2001/310/EC of 4
April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes (OJ L 109,
19.4.2001, p. 56); and the Memorandum of Understanding on a Cross-border Out-of-Court Complaints Network for Financial
Services in the EEA.
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PART V - ROLE
COMMISSION
OF
THE
on systematic weaknesses in the Commission’s monitoring of implementation
of EU law in the light of the crisis of the Equitable Life Assurance Society
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INDEX
PART V
Introduction
I.
The implementation of EU legislation - general background
1. Terminology
2. Directives and Member States’ obligations: ECJ jurisprudence
3. The European Commission's obligation under the Treaty
II.
The European Commission's monitoring of implementation in practice
1. Transposition
2. Application
3. Infringement procedures
III.
The need to ensure a comprehensive approach to implementation
Conclusions
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I.
Introduction
Much has been said already in Part II of this Report (see there Point II.2.1) on the
Commission's role in monitoring the implementation of the 3LD and other related directives.
This part will be devoted to analysing whether there have been systematic weaknesses in the
Commission's monitoring of implementation in general and with regard to the ELAS case in
particular.
In order respond to its mandate, it is necessary to begin by defining the committee's
understanding of proper implementation of Community legislation and clarifying the relevant
terminology. The concept and terminology thus established will not only serve as basis for the
subsequent analysis undertaken in this part but applies throughout the entire report. This is of
particular relevance to Part II, where the implementation of the insurance directives and its
monitoring by the EC are examined, and also to Parts III and IV of the report. It is also
necessary to recall the duties and responsibilities of the various actors according to EU law.
This part goes on to identify, in general terms, the current practice followed and instruments
used by the Commission in monitoring both transposition of EU legislation and its application
on the ground. In doing so, reference is made to some of the major obstacles and difficulties
encountered in this respect, mainly by drawing from oral evidence presented to the committee
by Commission representatives and academic experts. Particular emphasis is laid on
infringement procedure as the main tool under Community law to remedy incorrect
implementation of EU legislation by the Member States.
The committee then identifies certain systematic and other weaknesses in the Commission's
approach to monitoring implementation. This is based also on the analysis of the
Commission's performance in monitoring the implementation of the Third Life Directive in
relation to Equitable Life, which is set out in Part II of this report. Finally, the committee
emphasises the need for a more comprehensive approach to ensuring effective implementation
of EU legislation and identifies a number of necessary elements of such an approach. The
committee puts forward a number of recommendations on how to improve these perceived
weaknesses.
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II.
The implementation of EU legislation - general background
1. Terminology
Before undertaking the analysis, it is necessary to clarify the terminology used in this report,
particularly as the key terms and definitions, which are sometimes used and interpreted in
different ways. For the purposes of this report and the EQUI committee's investigation, the
definitions used, in line with the European Parliament's latest Resolutions on implementation of
Community Law, are as follows:

Transposition: the process of transcribing EU law (e.g. a directive) into national
legislation;

Application: the process of applying and enforcing transposed EU law on a day-to-day
basis by the national authorities and/or regulators (also known sometimes as
'enforcement', see below);

Implementation: this wider concept encompasses both transposition and application. It
is a requirement of Community law that EU legislation should be implemented in an
effective, timely and proportionate manner (however, in some instances, it is used in a
more restrictive manner, as a synonym for 'application');

Implementing measures/provisions/rules: the laws, rules, regulations, fragments or
articles of national law that give effect to EU law;

Enforcement: sometimes used also as a synonym for application but more frequently
makes reference to the process of correcting or reversing the mis-application of national
law, implying the existence of a malfunction or anomaly in the way national law is
being applied, which must be corrected by the national authorities, if need be by
coercive action.
Having established these brief points of reference, we will analyse to what extent EU law
creates obligations for Member States. The subsequent focus of this analysis is on Directives
and not Regulations or other legal instruments, given that the former are the most common type
of EU law and that the current investigation into the ELAS case hinges particularly on the
implementation of a directive, the Third Life Directive1 (3LD).
2. Directives and Member States’ obligations: ECJ jurisprudence
1
Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and administrative provisions
relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (third life assurance Directive) (OJ L
311, 14.11.1997, p.34).
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Under Article 249 of the EC Treaty, directives are binding as to the result to be achieved but
leave to the national authorities the choice of form and methods for their implementation. In
contrast to regulations, directives impose obligations of result and not obligations of conduct;
they allow Member States flexibility in choosing the method of their transposition into national
law, thus in theory facilitating the integration of Community norms into domestic law and
respecting the various national legal traditions.
This theoretical facility does indeed have some advantages in political terms: It is argued by
some that directives provide for efficiency because they leave some discretion with regard to
implementation and so are easier for Member States to agree upon. Much of EU law would
not have been adopted if it had not been presented in the form of a directive. Directives have
the advantage of being a very flexible instrument and Member States can incorporate them
more easily into their diverse legal systems.
This flexibility and the different forms and methods of transposition are compatible with
Community law, according to the case law of the European Court of Justice. Moreover, the
Court has even acknowledged that there may be exceptional cases where the adoption of
specific legislative measures is not indispensable, for instance, when there is a “clear and
precise conformity” between a directive and existing national legislation.1 The freedom of
choice on the methods and forms does not exempt Member States from the binding effects of
a directive “as to the results to be achieved”. In addition, Member States are subject to the
comprehensive loyalty clause of Article 10 TEC, which imposes upon them the duty to “take
all appropriate measures, whether general or particular, to ensure fulfilment of the
obligations arising out of this Treaty or resulting from action taken by the institutions of the
Community.” Moreover, legislation which has been adapted to EC directives may not
subsequently be amended contrary to the objectives of those directives.
In assessing the suitability and conformity of implementing measures, the Court places
particular emphasis on the purpose of the directive. The crucial issue is whether the Member
State in question has adopted all the necessary measures to ensure the full effectiveness of the
directive in accordance with the objective which the latter pursues.2
The Court stresses that Member States are under an obligation to ensure the full and effective
application of a directive. To meet this obligation, it is not sufficient for a Member State
merely to adopt the necessary transposing legislation. In other words, implementation is not,
in the eyes of the Court, a one-off task of a purely legislative nature. The adoption of national
measures correctly transposing a directive does not exhaust the effects of the directive. The
Member State remains bound to ensure compliance with the provisions of a directive even
after the adoption of implementing measures:
“… the adoption of national measures correctly implementing a directive does not
exhaust the effects of the directive. Member States remain bound actually to ensure
full application of the directive even after the adoption of those measures. Individuals
are therefore entitled to rely before national courts, against the State, on the
provisions of a directive which appear, so far as their subject-matter is concerned, to
1
2
See Case 29/84 Commission v Germany [1985] ECR 1661, paragraph 23.
See Case 14/83 von Colson and Kaman [1984] ECR 1891, paragraph 15.
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be unconditional and sufficiently precise whenever the full application of the directive
is not in fact secured, that is to say, not only where the directive has not been
implemented or has been implemented incorrectly, but also where the national
measures correctly implementing the directive are not being applied in such a way
as to achieve the result sought by it.” 1
Further, the Court has repeatedly held that directives are binding on all the authorities of the
Member States. Thus, not only the legislature is bound by a Directive but also the
administrative agencies responsible for the day-to-day application and enforcement of the law
and the domestic courts. The intention behind this is to avoid administrative practices or
judicial interpretations that undermine the protection of interests established by the directive.
In recent years, the Court has placed particular emphasis on tackling the problem of “second
level non-compliance”, that is, the situation where, although domestic legislation is formally
compatible with Community law, its application or enforcement is undermined by
administrative or judicial practices.
The Court has also held that a national administrative practice can be the subject of an
enforcement action when it is, to some degree, of a consistent and general nature.2 Thus, at
least the systematic and consistent tolerance on the part of national authorities of situations
inconsistent with the provisions of a directive is a breach of Community law even if the
directive has been formally transposed into national law.3
Finally, where a directive confers rights on individuals, the relevant domestic legislation must
be sufficiently precise and clear so that the persons concerned are made fully aware of their
rights, and, where appropriate, afforded the possibility of relying on them before national
courts.4 From a judicial protection perspective, the precision and clarity of domestic
implementing legislation is crucial because it paves the way to obtaining redress before a
national court where a Member State fails to ensure the full and effective application of a
directive.
3. The Commission's obligation under the Treaty to monitor implementation
The Treaty gives the Commission the role of the guardian of EU law. In accordance with
Article 211 of the Treaty, it is the duty of the Commission to ensure that Member States
observe and implement Community law properly. Therefore, it is the Commission's
responsibility to monitor the transposition and application of EC Directives. It does so by:



verifying if Member States have adopted transposing legislation and communicated
them to the Commission within the prescribed time limit;
verifying the conformity of national transposition measures with Community
legislation;
monitoring the application of EU legislation by private and public entities, bodies and
authorities
1
See Case C-62/00, Marks & Spencer v. Commissioners of Customs and Excise [2002] ECR I-6325, para 27.
See e.g. Case C-387/99, Commission v. Germany, judgment of 29 April 2004, para 42.
3 Case C-494/01, Commission v Ireland, judgment of 26 April 2005.
4 See Case C-59/89, Commission v Germany.
2
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
rectifying failures to comply with EU legislation through the launch of infringement
proceedings.
Articles 226 and 228 of the Treaty provide for a procedure in cases where the Commission
considers that a Member State has failed to fulfil an obligation under Community law.
Article 226 empowers the Commission to take action against a Member States for instances of
failure to fulfil their obligations under the Treaty. The Commission has full discretion in
deciding whether or not to initiate infringement proceedings.
The procedure starts with a letter of formal notice to the Member State, which enables it to
give information and to exercise its right of defence. If the answer does not satisfy the
Commission, it issues a reasoned opinion, ordering the Member State to rectify the situation.
If the infringement persists, the Commission may refer the case to the ECJ.
Under Article 228 of the Treaty, the ECJ may impose a pecuniary penalty if there is a persistent
failure of a Member State to comply with a judgement under Article 226. Under relevant case
law, the objective of infringement proceedings under EU law is to establish or restore the
compatibility of existing national law with EU law and not to rule on the possible past
incompatibility of a national law which has since been amended or replaced. Thus, there is
actually no ex-post investigation of alleged violations of Community law.
III.
The Commission's monitoring of implementation in practice
The committee received evidence on the Commission's approach to monitoring
implementation both from representatives of the Commission during H10 and from academic
experts at WS2. This section not only makes reference to the general approach taken, and
instruments used, by the Commission to ensure timely and correct implementation but also
touches upon some of problems, difficulties and constraints the Commission faces in fulfilling
its obligation to monitor the implementation of EU law.
1.
Transposition
Communication of transposition measures
Firstly, the Commission checks whether Member States communicate (by the time specified
in the Directive itself) the national measures, which are intended to transpose a particular
piece of EU legislation. As explained by Mrs. DURAND "regarding non-communication of
transposition measures, the Commission carries out systematic controls of all these measures.
To this end, it has set up, since 2004, at the level of the Secretariat-General of the
Commission, a database which indexes all the directives whose transposition period is under
way. All the Member States have adopted this same database and, henceforth, they
communicate the transposition measures via this database. Only one correspondent by
Member State is permitted to introduce the transposition measures and he or she specifies, at
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the time each measure is transmitted, if the transmission is still incomplete or finalized".
The Commission claims that this database enables it to constantly have an exact image of the
state of the transposition. If, at the expiry of the period of transposition, not all measures are
communicated, the Commission immediately begins the infringement procedure (see below
for detail on infringement procedure). Mrs. DURAND states that "for the 146 directives to be
transposed by the 25 Member States in 2006, the Commission noted late transposition in 900
cases, approximately 8 to 9 Member States by directive. It is to be recalled that, in a majority
of cases, the problems are solved within a year. The Commission moves on to the next level of
the infringement procedure in approximately 70 cases a year", adding that "les chiffres des
non-communications sont plutôt en diminution dans le temps, [ce qui montre] leur
efficacité."1.
Mr. VOGENAUER claimed that the checking of notification by Member States of
transposing legislation is "not really done as systematically as you might wish". He pointed
out that "the Commission has only very recently started publicizing the information on
national implementing measures" and claimed that the information is not complete and up to
date.
Checking conformity of transposition measures with EU legislation
The Commission subsequently checks whether the national measures that have been
communicated are in conformity with the requirements of the EU Directive. Sometimes this
work is contracted out to external consultants, as was the case with the Third Life Directive2.
More often, however, the Directorates-General of the Commission carry out their own
analysis. This examination requires both extensive expertise of legal issues and technical
knowledge in the field covered by the Directive. Mrs. DURAND explained that "l'examen
exige une très bonne connaissance de la directive et ne peut-être fait que par les spécialistes
de la matière. Various methods are used according to the content of the directive and its
context. Either the text is checked integrally or at least some of his essential provisions or an
a posteriori check is undertaken, via implementation reports or on-the-spot surveys. When a
textual checking is carried out, the translation of the text becomes essential. Either the
translation of the text is carried out by the translation services of the Commission, thus
allowing the examination by the relevant officials, or otherwise the translation and control
are carried out by external contractors whose analysis has nevertheless to be the checked by
Commission officials to ensure the quality of the contractor's work. ... Nos services de
traduction traduisent chaque année 20.000 pages de législations nationales3
Questioned on the existence within the Commission services of a general 'rule book' on
guidance to transposition, Mrs. DURAND replied that "the verification of the transposition is
in a sense a fairly straightforward exercise. You have to check whether each provision finds
its way into the national regulation. Some provisions of the directive do not need sometimes to
be transposed, and this has to be assessed on a case-by-case basis", however admitting that
there were no "fixed guidelines which would you would find on paper – step one, step two,
step three. But the whole sector of infringement is followed for the whole of the Commission
1
H10 Verbatim, page 6, para.9.
see Wilde Sapte study (WE20).
3 H10 Verbatim, page 7, para.5.
2
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by the Secretariat, together with the Legal Service. Each case is brought up regularly in front
of a general meeting and each case is reviewed. This is the way we follow up any bad
application."1
Problems encountered
As explained by Mrs. DURAND, "when Member States transpose the directive by simply
referring to it in their national legislation, control is easy; this transposition technique is
legally correct, in as far as the directive is identified clearly in the national act and it contains
the reference of the publication of the directive in the Official Journal. In this case, the
directive does not leave choices open to the Member State." However, Directives are often not
transposed via a single act but by numerous different measures scattered throughout national
legislation. In the Member States with decentralised or federal structures, measures are very
often adopted at a regional level. Moreover, Member States often implement Directives by
amending multiple pieces of existing legislation. This makes the verification of compliance
with Community legislation a difficult, time- and resource-intensive exercise.
Commission representatives highlighted in particular how monitoring the transposition and
application of EC legislation throughout the EU is hindered by the absence of an ‘Adriadne’s
thread’ in the form of correlation tables in the notice of transposition sent by Member States
to the Commission. Their task would be much easier if "systématiquement chaque directive
contienne l'obligation pour les États membres de transmettre une table de concordance de
leurs mesures par rapport à la directive et évidemment qu'ils respectent cette obligation. La
Commission introduit systématiquement, depuis 2003, une disposition à cet effet, mais le texte
final de la directive ne contient pas toujours une disposition exigeant les tables de
concordance. La Commission a noté plutôt une amélioration, mais elle plaide avec insistance
pour qu'elle soit présente de manière systématique et pour que les États membres la
respectent."2
To this one must add the fact that these national legislations have to be translated into the 21
official EU languages before they can be examined by the experts. Mrs. DURAND quoted the
numbers: "In 2006, the Commission received 10,000 transposition measures in 19-20
languages and 7,000 in Bulgarian and in Romanian". As most directives contain very
technical elements, they can only be verified by the Commission if a proper translation is
received.
However, translations are not always available. The Commission claims that it tries to take
some practical steps to solve this problem. Instead of simply translating everything, the
lawyers and translators try to identify together the crucial parts to be translated. The difficulty,
in part, is the separation of the technical expertise from the linguistic expertise. For budgetary
reasons, it is not possible to have 27 administrators for each and every directive – one for each
Member State – or 21 administrators, one for each language. So inevitably the Commission
has to work with translations, which entails a certain loss of information. Mr. VOGENAUER
referred to a related problem, namely that "there is no common framework of specific legal
terminology", in many areas of European law, so the terms and concepts do not always have
"a clear-cut meaning as they would have in domestic legal systems". Thus the terms used in
1
2
H10 Verbatim, page 29, para.6.
Mrs. DURAND, H10.
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the different language versions of EU legislation sometimes differ in their legal implications.
The question of appropriate ressources is key, as confirmed by Mrs. DURAND: "La
Commission a des ressources limitées, qu'elle attribue aux différentes tâches qui sont les
siennes et, compte tenu du volume d'infractions que nous avons, cela concerne un nombre de
ressources considérable. Peut-être est-on un peu à la limite de nos possibilités pour gérer les
3500 cas en question. Le problème des ressources est un problème sensible ... effectivement,
on ne pourra gérer plus efficacement et plus rapidement, et surtout être encore plus proactifs,
que si nous disposons des ressources humaines nécessaires. Aucun doute sur la question,
compliquée toujours par le problème linguistique."1
It is clear that the Commission can only perform adequate monitoring of transposition of the
highest of standards if it has more means at its disposal. In the case of the Third Life
Directive, the lack of resources made it necessary to contract external consultants, who
produced an incomplete study of poor quality as is shown in Part II of this report. It must be
stressed, however, that the Commission failed to supervise the work of the external
consultants in a way that would have ensured a satisfactory analysis of the Member States'
transposition of the Third life Directive.
Complementary methods used to improve transposition
In recent years, the Commission appears to have made increasing use of complementary
methods to ex-post verification, in order to guarantee correct transposition of directives. First
of all, before the actual process of monitoring transposition is dealt with, mention must be
made of the procedure that is applied before laws are adopted. Quality legislative drafting is
necessary for proper implementation. As expressed by Mrs. DURAND "during the
development of Directives, legislators must already think of the practical implications of the
law, and must incorporate suitable provisions that make the law coherent and applicable in
practice". During this process, extensive consultations with the public and other stakeholders
are of the essence. Mrs MINOR referred to the importance of involving national regulators in
the preparation of EU legislation: "The idea behind having supervisors and regulators provide
technical advice in the course of preparation of regulatory measures is that they will
understand what those measures are going to achieve. They also feel ownership for the rules
which are subsequently adopted because they have been adopted by a process in which the
regulators, the people who will have to apply them, were involved from the outset."
Moreover, efforts are being made to intensify and structure the dialogue with Member States
during the transposition period. This allows for the exchange of good practices and gives
support to national authorities to guarantee proper transposition of EU acts. To this effect,
information-gathering exercises were undertaken amongst Member States and resulted, as
clarified by Mrs MINOR "in a Recommendation on transposition, adopted and published by
the Commission in July 2004. It contains a list of 27 practices which have been found effective
as a means of quality transposition. It includes, for example, allocating the responsibility for
coordinating Community affairs, and more specifically the transposition process, to a senior
member of the government; designating within the national administration a body which
monitors the implementation process on a permanent basis; and involving the national
1
H10 Verbatim, page 10, para.3-4.
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parliament at all stages in the legislative process, both before and after the adoption of the
directive".
Mrs MINOR added that "we make great efforts to assist and support Member States during
the ‘transposition period’ in the course of implementing directives ... working very actively
with Member States to try and iron out any residual differences of interpretation, ambiguities
or questions as to how different provisions within the directive ought to be transposed. We try
and share best practice, so if one Member State has found a particular way of resolving an
issue thrown up by the directive, that can be explained to the others. We do this through either
the committees, which are in any event created under those directives, or by expert groups.
Our aim is clearly to secure a shared understanding of the impact of the Community measure.
We want all Member States upstream of implementation and application to agree on what the
directive is trying to achieve and how it goes about it, and, in consequence, to bring about
very high-quality national implementing measures. ... On the other hand, I think we have to
remind Member States ... that the rules which they are applying are not rules which are
imposed against the will of Member States. These are rules to which Member States have
signed up. ..."1
With regard to specific areas of EU legislation, the Commission "very rarely"
(Mr VOGENAUER) publishes interpretative communications or guidance documents, aimed
at helping Member States to transpose (and in some cases to apply) certain provisions.
Mr VOGENAUER also refers to transposition workshops as "informal meetings between
Commission officials and members of the Member States' legislatures, where issues are
discussed and clarified". Mrs. MINOR explained how "sharing of best practice is also used,
particularly if one Member State has found a particular way of resolving an issue thrown up
by the directive. This is done either through the standing committees that are created under
the specific directive in question or via expert groups".
Finally, another method used by the Commission is the publication of 'implementation
scoreboards', which indicate Member States' performance in transposing directives in certain
areas. This can be regarded as a 'name and shame' exercise, which creates incentives for
Member States to transpose EU legislation in a timely and correct manner. Mrs MINOR
recalled that "in order to highlight the issue of transposition, and as a means of stimulating
peer pressure amongst Member States, DG MARKT instigated the Internal Market
Scoreboard2 ten years ago. The first scoreboard in 1997 showed an average ‘transposition
deficit’ – i.e. the number of directives not implemented – of 6.3%. This provoked a reaction at
the very highest level, and European Councils ... have made repeated calls to Member States
to reach an ‘interim’ transposition deficit of 1.5% – i.e. to have no more than 1.5% of all
internal market directives not implemented. The last scoreboard (February 2007) showed that
in fact a majority of Member States have reached that interim target of 1.5%. The conclusion
we draw, therefore, is that timely implementation is possible."3
An issue repeatedly debated was the question if the systematic use of EC regulations would
not be a better option to ensure speedy and accurate application of EC legislation throughout
1
H10 Verbatim, page 16, para.4 and page 18, para.2.
In addition to the Internal Market scoreboard, a specific scoreboard in the financial services area, gives an overview of how
the Financial Services Action Plan and Lamfalussy directives have been transposed into national law (updated twice a month
and published on the Commission’s website).
3 H10 Verbatim, page 15, para.6.
2
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the EU. On this subject, Mrs. DURAND reminded that " le traité impose parfois le recours à
la directive. Dans certains cas, il apparaît aussi que laisser des libertés aux États membres
constitue politiquement, et compte tenu du secteur, la meilleure voie, et la directive s'impose.
Mais les États membres eux-mêmes incitent à l'occasion la Commission à choisir plutôt la
voie du règlement." Mrs MINOR echoed by stating that "perhaps we should make more use of
regulations, but the reality is that most Member States are somewhat reluctant to expand the
use of the regulation in preference to the directive. Most Member States continue to prefer the
directive as a means of legislation, because it enables them to adapt the rules, not necessarily
mis-adapt or abuse that power of adaptation, but to adapt the rules to the national context.
..."1
2.
Application
As explained previously, Member States are under an obligation to ensure the full and
effective application of a directive; they are not discharged of this obligation merely by
adopting the necessary implementing measures. The adoption of national measures correctly
transposing a directive does not exhaust the effects of the directive. The provisions of a
Directive also have to be applied so as to achieve the objectives pursued.
Commission representatives emphasized the key role of Member States in cooperating for a
consistent application of EC legislation. "Il est du devoir de la Commission de veiller à la
bonne application du droit communautaire, mais il est aussi de la responsabilité première des
États membres de le respecter", said Mrs. DURAND, recalling that "les inspecteurs de la
Commission ne se substituent pas aux contrôleurs nationaux. Ce qu'il font, c'est qu'ils
vérifient si les contrôles nationaux ont bien été mis en place." Although the Member States
have the primary responsibility for ensuring application, it is also up to the Commission to
monitor proper and full implementation of EU law, which includes application as well as
transposition. One of the key elements for improving the follow-up of application is the need
to increase the Member States' awareness of their duties and obligations when complying with
the common rules. It is first and foremost at the national level that the key control
mechanisms have to be implemented2. However, the Commission also needs to diversify its
methods with a view to ensuring speedier solutions and preventing infringements.
Mrs MINOR explained how the day-to-day application of Community law is done: "it lies in
the hands of national officials. In some cases, as in the supervision of banking and insurance
legislation, there is a clearly identified central authority, even sometimes an individual, with
whom the ultimate responsibility lies. But in other cases, such as public procurement, or the
field of recognition of diplomas, there are a myriad of national officials who take decisions at
national, regional, local and individual level, and it is difficult for the Commission to
supervise or audit those individual decisions. The Commission relies upon the functioning of
the system or the sector as a whole in order to determine whether there is the need for
corrective action".
1
H10 Verbatim, page 18, para.3.
Some Members States have developed better practices that others in the field of implementation. The UK, in the last years,
is one of the most dedicated to improve those good administrative and legislative practices. See, for instance, the
"Transposition guide: how to implement European directives effectively" published by the Cabinet Office of "Lost in
Translation? Responding to challenges of European Law" published by the National Audit Office.
2
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The Commission currently acquires such information through complaints and petitions. This
is perhaps a slightly reactive attitude, inasmuch as the Commission, on account of its lack of
resources, can only rely passively on the information it receives and in this regard it attaches
the greatest priority to those issues which arrive by way of petitions and complaints. Other
sources of information are also used: the Commission tries to establish regular contact with
the stakeholders in a particular sector or simply tries to monitor press developments. The
SOLVIT1 mechanism is also used2.
Other fora where the Commission gathers information include the standing technical or
comitology committees set up under various Directives. For example, there is an Internal
Market Advisory Committee, which brings together officials from the Member States with an
overall responsibility for the internal market. There are also networks of regulators and
officials, or groups of experts, such as the national competition network in the field of
competition policy. In the financial services sector, the Lamfalussy approach serves as an
additional means to help ensure effective and convergent implementation of EU legislation
across Member States. At level 3, it includes networking between regulators with a view to
producing joint interpretative recommendations, consistent guidelines and common standards,
peer reviews and comparisons between regulatory practice to foster consistent implementation
and application. As Mrs MINOR put it, "regulators and supervisors ... cooperate in the dayto-day application of Community legislation. Once the measures have been transposed and
being applied on a daily basis, there are regular meetings of regulators3".
The Commission has repeatedly stated that it cannot assume the role of supervising national
authorities or individual entities on a systematic basis. The Commission claims that, with the
current staff resources at its disposal, it is not feasible to send out teams of officials in search
of cases of incorrect application throughout the 27 Member States. Only in certain special
sectors, such as fisheries and human health, do inspectors carry out on-the-spot checks. For
most other areas, the Commission tries instead to encourage Member States' regulators and
supervisors to work more closely together by carrying out peer reviews, adopting Protocols or
Memorandums of Understanding for the coordinated application of specific directives and
generally pursuing a policy of supervisory convergence. The hope is that problems of
incorrect application of Community legislation will be detected at an earlier stage.
"Les services de la Commission développent des méthodes proactives pour déceler ces cas de
mauvaise application. Compte tenu de ses moyens, cette tâche n'est pas aisée. Mais par
exemple, si un problème se présente dans quelques États membres, nous procédons à la
1
SOLVIT has been working since July 2002 and is an on-line problem solving network in which EU Member States work
together to solve without legal proceedings problems caused by the misapplication of Internal Market law by public
authorities. There is a SOLVIT centre in every EU Member State (as well as in Norway, Iceland and Liechtenstein) helping
with handling complaints from both citizens and businesses. They are part of the national administration and are committed
to providing solutions to problems within ten weeks. Using SOLVIT is free of charge. The SOLVIT network, operated by the
Member States, is coordinated by the Commission who provides database facilities and may help to speed up the resolution
of problems. The Commission also passes formal complaints it receives on to SOLVIT if there is a good chance that the
problem could be solved without legal action. See: http://ec.europa.eu/solvit/site/index_en.htm
2 In its resolution on the Commission's 21st and 22nd Annual reports on monitoring the application of Community law
(P6(2006)202), the EP noted the SOLVIT network has proved its effectiveness as a complementary non-judicial mechanism
which has increased voluntary cooperation among Member States, but considers that such mechanisms should not be
regarded as a substitute for infringement proceedings (para.18).
3 see explanations on CEIOPS in Part IV.
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vérification de la situation dans les autres États membres."1
On the overall consistency of EC law application, Mr. AYRAL (H10) stated that "nous
n'avons pas le pouvoir d'intervention auprès des États membres pour nous assurer qu'ils
respectent, qu'ils appliquent la législation de la même manière. Nous pouvons nous assurer
qu'ils appliquent correctement la législation, mais nous ne pouvons pas nous assurer qu'ils
appliquent la législation de la même manière. Et c'est pour cela que nous allons faire des
propositions pour compléter le cadre réglementaire pour les produits, afin de donner la
garantie aux opérateurs et aux consommateurs que la législation technique européenne sera
appliquée de la même manière dans tous les États membres."
3.
Failures to implement Community law - the infringement procedure
The Commission initiates the infringement proceedings in accordance with Article 226 TEC
either in response to a complaint from a complainant within the Member State or on its own
initiative (information gained for example through the press, European Parliament questions,
etc.).
Mr VOGENAUER described the procedure followed in practice: "They do record potential
infringement in a register. They then turn to the Member States to request further
clarifications in negotiations. Only then the official infringement procedure starts, they send a
letter of formal notice to the Member State, usually give a deadline for a reply. After expiry of
that deadline, the Commission issues a reasoned opinion again with a deadline and if the
Member State has not complied only then is the whole issue referred to the ECJ. The
Commission is under no legal obligation to do so, it enjoys very wide discretion."
However, Mr VOGENAUER pointed out that "there are quite a few problems with this
procedure. First, it only works once the damage has been caused. The Member State has got
to be in violation of its obligations already. The biggest problem is that there are no fixed
non-negotiable deadlines, so the whole procedure is very cumbersome. It takes on average ...
45 months between the registration of a complaint and an eventual referral to the courts. A
Member State can be in breach of its obligations for more than 4 years before the whole issue
is referred to the courts. In fact, some Member States can use that to their advantage and play
for time and if they just reply before the expiry of the final deadline, they will go on
completely without sanction. Another problem is the discretion of the European Commission.
Neither the Council or the European Parliament nor an individual can bring these
proceedings. They can only report or lodge a complaint with the Commission or the
European Parliament."
The Commission pointed out that the infringement procedure has evolved over time and,
again according to the Commission, two additional instruments enhance its performance
today:
Firstly, there is the more recent provision of Article 228, which gives the ECJ jurisdiction to
1
H10 Verbatim, Mrs. DURAND, page 7, par.7.
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impose a pecuniary penalty if there is a persistent failure on the part of a Member States to
comply with a judgement under Article 226 - "en cas de non-respect de l'arrêt de la Cour, la
Commission peut saisir une deuxième fois et la Cour peut imposer une astreinte financière
pour contraindre l'État membre à exécuter son premier arrêt (article 228 TEC). ... Cette
nouvelle politique de la Commission est évidemment destinée à prévenir les cas de nonexécution des arrêts de la Cour, par la menace de sanctions financières. Cette menace est
efficace"1. Mr VOGENAUER, however, was critical, pointing out that "this is so slow that,
[when it was applied for the first time], Greece was condemned to make a penalty payment 13
years after the initial complaint had been launched. Only 3 judgements have been given since
1993 on this specific procedure."
Secondly, as pointed out by Mrs DURAND "dans quelques cas, la Commission a soumis à la
Cour des affaires en urgence et elle a demandé à la Cour d'imposer la suspension de la
mesure litigieuse. Des arrêts de la Cour ont donc pu être obtenus dans des délais très brefs.
Cette procédure particulière obéit évidemment à des conditions strictes sur l'urgence, qui ne
sont pas souvent réunies". Considering the issue of applying 'on-the-spot' fines for misapplication of EC legislation, Mrs DURAND took the view that "jusqu'à présent, on a plutôt
un système où les droits de la défense doivent pouvoir s'exercer et, par conséquent,
l'imposition immédiate de pénalités me semble difficilement envisageable. Un des moyens de
pression qu'on utilise aussi, c'est que, dans l'hypothèse où l'infraction se circonscrit dans le
cadre des Fonds structurels, la Commission suspend les paiements aux États membres, ce qui
est un moyen de pression assez efficace."2
Mrs DURAND concluded that "les méthodes mises en place pour assurer le contrôle de
l'application du droit communautaire se sont diversifiées dans le but d'obtenir une mise en
conformité plus rapide... Les méthodes doivent être améliorées. Elles reposent nécessairement
sur une responsabilisation accrue des États membres mais aussi sur une diversification des
moyens et des méthodes selon les types d'infraction."3
Mrs DURAND stated that "the Commission detects approximately 1,000 to 1,500 cases a
year of incorrect application of the Community law, whether it is incorrect application of the
Treaty or of incorrect application of the directives. Citizens' and companies' complaints are
the primary source of information to detect cases of incorrect application". The proportion of
the cases opened automatically by the Commission is on the increase and represents almost
half cases of incorrect application. Around 3,500 cases are currently pending. Approximately
40% of them are settled after the letter of formal notice and approximately 40% more of the
cases are closed at the reasoned opinion stage. The Commission brings approximately 170
cases a year before the ECJ, i.e. approximately 10%.
1
According to Commission sources (H10), 39 cases have so far been pursued under Article228 TEC (4% of infringement
procedures), and only in 4 cases the ECJ has effectively imposed a financial sanction on the Member State concerned
(Verbatim, page 14, par.9).
2 H10 Verbatim, page 14, par.10.
3 H10 Verbatim, page 9, par. 5.
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IV.
The need to ensure a comprehensive approach to implementation
It is apparent to the committee that the Commission carried out its monitoring of the
implementation of the 3LD in line with the philosophy prevailing at the time1. Thus, it merely
checked the formal legal transposition of the 3LD's provisions into UK law. However, there
was no evaluation of the quality of the national legislation transposing the 3LD. Moreover and
most importantly, there was no monitoring of the subsequent stages in the implementation
process, i.e. the practical application of the 3LD by national authorities. The absence of
complaints from individuals is no excuse for the lack of monitoring of application. Indeed, the
Commission's passive attitude is illustrated by the fact that it did not become aware of the
problems until early 2001, when Members of this Parliament began to contact the institution
on behalf of their constituents who were ELAS policyholders.
It is also apparent to the committee that there needs to be a more active oversight, even in a
random fashion, of key directives. This necessarily implies close scrutiny of national events
by the Commission. This lack of scrutiny can be identified as a systematic weakness
encountered within the institution.
The passive role played by the Commission in relation to monitoring the application of the
3LD is not only a corollary of a certain philosophy which placed too much importance in
producing legislation and less in ensuring its implementation but is moreover a consequence,
to a certain extent, of a lack of resources that the devoted to this area by the Commission.
Lack of resources also continues to be a problem in the monitoring of transposition
(especially linguistic capacities, as the implementing legislation received is not even
translated). It is clear that the Commission can only perform adequate monitoring of
transposition of the highest of standards if it has more means at its disposal. In case of the
Third Life Directive, the lack of resources made it necessary to contract external consultants,
who produced an incomplete study of poor quality, as is shown in Part II of this report. It
must be stressed, however, that the Commission failed to supervise the work of the external
consultants in a way that would have ensured a satisfactory analysis of the Member States'
transposition of the Third life Directive.
***
There seems to be a consensus of opinion on the need for all European institutions to give
more serious consideration to the question of monitoring implementation2, both in terms of
transposition as well as application. The correct application of the Community law is a central
element of the EU's institutional system. It is a prerequisite for the effectiveness of European
regulations and of the respect of equality between the Member States. Moreover, it guarantees
that companies, consumers and citizens can exercise the rights that they derive from European
1
The Commission's actions with regard to monitoring the implementation of the Third Life Directive are dealt with
exhaustively in section II.2 of Part II of this report.
2
See specially European Parliament Resolution on Monitoring the application of Community Law ( 2003-2004) and EP
Resolution on the implementation, consequences and impact of the internal market legislation in force, both adopted on 16
May 2006. See also the European Commission's 21st and 22nd annual reports (COM(2004)0839 and COM(2005)0570).
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law in a rapid and effective way.
Correct and swift implementation of European legislation is an integral and essential part of
the “Better regulation” strategy, which has been put at the heart of the re-launched Lisbon
Agenda for jobs and growth in 2005. The aim is to improve EU policies by strengthening their
transparency, coherence, effectiveness and efficiency, while at the same time boosting public
participation and accountability in the process of their development. Efforts to improve the
regulatory environment will only produce the expected results if European regulations are
applied correctly and effectively.
The current approach to monitoring implementation is still too often characterised by a
narrow focus on formal legal transposition. What is needed instead is a continuous hands-on
approach to implementation by EU institutions throughout the various stages of the process of
translating the intentions of the EU legislators into practical effects for European citizens.
Thus, a new concept of dynamic transposition implies that the monitoring of implementation
needs to be done over a longer period of time and not just as a mere one-off box-ticking
exercise, as is too often the case. More importantly, the original will and intention of the
legislator must be respected.
In fact, the objective of ensuring effective implementation should be taken into account as
early as the stages of drafting and adopting legislation. This has been recognised by the 'better
regulation agenda' but continuous efforts are needed to ensure that EU legislation becomes
clearer and simpler to implement. Problems of transposition and implementation often result
from poorly drafted legislative texts. Thus, European legislative authorities have an important
responsibility in this regard and should therefore avoid complicated and unclear compromises
in negotiations. For example, textual ambiguities generate legal uncertainties and
discrepancies when texts are transposed into national law, with the potential for distortion of
competition and fragmentation of the internal market. It would therefore be desirable that all
the community bodies involved in the lawmaking process take into account the potential
difficulties of application of EU law at the drafting stage, by putting more effort into assessing
foreseeable difficulties which may arise.
Furthermore, when adopting EU legislation, it is important for Member States to be required
to provide so-called correspondence tables, indicating how each of the provisions is
transposed into national legislation. The Commission now makes it a point of principle to
include in its proposals a request for correspondence tables. However, they are, regrettably,
eliminated in the course of the legislative procedure in three-quarters of all cases. It is
probable that many Member States find these correlation tables burdensome and therefore
seek to remove the provision from the proposal, and in many cases they are successful. It is
therefore necessary for the European Parliament to ensure consistent support for the insistence
on correspondence tables in new legislation.
Once EU legislation is adopted, increased efforts must be made proactively to assist the
Member States in transposing it into national law, for instance through the regular publication
of interpretative communications and guidance texts. In addition, transposition workshops and
seminars should be used more systematically because they allow the authorities of Member
States to exchange their views and discuss the correct transposition of key provision and
requirements contained in EU directives and may thereby contribute to a more uniform
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implementation throughout the EU.
Subsequently, in monitoring transposition, the Commission should not only check whether
the EU provisions have been transposed formally but also pay more attention to evaluating the
quality of the implementing measures, since many cases of incorrect implementation are the
result of poor quality national legislation, which sometimes reflects Member States' deliberate
efforts to undermine EU legislation for political, administrative and economic reasons. In
addition, directives are often transposed in a fragmented way, i.e. not into one single national
law but spread throughout different acts of varying levels in the legal hierarchy. It is clear that
this way of transposing, though legally legitimate, is not helpful either for monitoring
implementation or for transparency's sake. In this context, it is worth quoting Commissioner
McCreevy (H8): "However, to be brutally honest, for some of the transpositions, you would
have to be an absolute genius to find the needle in the haystack of the particular implementing
legislation as to where the original EU directive is." These issues must be addressed when the
Commission assesses the quality of transposition.
Most importantly, however, there has to be a more systematic and proactive assessment of
how EU legislation is being applied in practice. As far as key directives are concerned, the
Commission may not only rely on complaints and press reports before it starts investigating
possible problems. Instead, it should be proactive in looking into the practical application of
key pieces of EU legislation throughout the Member States. It should first assess whether the
application in practice complies with the EU requirements and secondly evaluate whether the
results achieved correspond to the objectives originally pursued. The Commission should
regularly report its findings to the European Parliament. If it is found that the objectives were
not met, legislative amendments should be considered.
There is also an urgent need to speed up infringement procedures. When deciding on opening
or following-up infringement procedures, the Commission currently organises four meetings a
year and all decisions (from the first letter of formal notice to the decision to seize the Court
of Justice) are taken by the College of Commissioners. In its resolution of 16 May 2006 1 the
European Parliament requested that "careful thought be given to the possibility of the internal
procedures being shortened in the initial stage of proceedings by authorising each Member of
the Commission to send letters of formal notice to the Member States within the field of
his/her responsibility (as is already the practice in cases where a Member State has not
transposed Community law into its national legislation within the set deadline).2"Referring to
the need for swift and targeted action in key areas, the EP requested in another resolution3 that
the Commission "establish a transparent fast-track infringement procedure for internal
market test cases and that it inform Parliament on how its priority criteria for infringement
handling ... are in practice screened and brought to the attention of complainants" 4 and
urged the introduction of "sanctions for non-compliance."5
The importance of implementation might be further underlined by the creation of a
1
EP resolution on the Commission's 21st and 22nd Annual reports on monitoring the application of Community law (20032004) - P6_TA(2006)0202.
2 Par.7.
3 EP resolution on the implementation, consequences and impact of the internal market legislation in force P6_TA(2006)0204.
4 Par.13.
5 Par.14.
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Commissioner directly responsible for the transposition and application of EC law, assisted by
a dedicated task-force for Transposition and Application' inside the Commission. If the
Commission is really committed to upgrading its performance in this key issue, the
designation of a Commissioner specifically responsible for this task would send not only a
clear political message but also help to coordinate all the efforts which are currently
undertaken separately and to varying degrees by the different Directorates General and the
General Secretariat of the EC. This Commissioner would group under his responsibility all
horizontal departments dealing with implementation and be responsible for the coordination
of the other vertical units in all Directorates-General.
Parliament has already suggested that Member States also "appoint political figures
responsible at national level for infringement policy"1 and called on the Commission to ask
Member States "to guarantee retroactive application of the Community provisions which have
been infringed, in order to remove all effects of the infringement, with an immediate recourse
to Article 228 of the EC Treaty in the event of persistent failure to comply."2
There should be increased involvement and participation of both the European Parliament and
the national parliaments in the process of monitoring implementation of Community Law. A
reduction in the amount of European legislation must be accompanied by more emphasis on
its implementation.
The European Parliament should be at the forefront in this respect but without interfering with
the competences and duties entrusted to the Commission by the Treaties. The Commission
and Parliament should create permanent channels of communication and establish a structured
dialogue on implementation issues. This has to be done at the highest political level and be
followed-up through the involvement of the various competent bodies within Parliament. The
collaboration of these two institutions is of paramount importance although the main
responsibility for implementation rests with the Commission as guardian of the Treaties.
The annual report on implementation of Community Law should become an in progress tool
for Parliament, permanently monitored by the parliamentary committees. Rather than being a
static annual document, it should be an instrument for committees to supervise EC actions in
the field of implementation. The committee responsible for better law-making, the Committee
on Legal Affairs, should play an important role in coordinating and liaising with the relevant
services in the Commission and with the leadership structures of Parliament, such as the
Presidency and the Conference of Presidents.
The specialised communication between the Commission and parliamentary committees in
the area should be permanent and structured. Parliament should adjust its procedures with a
view to playing a more active role in monitoring the implementation of legislation in the
Member States. Serious consideration should be given by the decision-making bodies of
Parliament to the establishment, within the committees, of permanent rapporteurs on
implementation or task-forces responsible for following up on the implementation of key
legislation adopted by each committee. The competent rapporteur should, alone or with the
help of the above mention permanent structures, play an active role in this area. Consideration
1
2
EP resolution P6_TA(2006)0202, par. 16.
EP resolution P6_TA(2006)0202, par. 17.
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should also be given to whether the Rules of Procedure need to be amended with a view to
providing for a more active role for Parliament in overseeing implementation.
The national parliaments should also play an important role. The involvement of national
legislative bodies in the field of European affairs has increased substantially over the last few
years and will continue to do so in the future. In this area, mechanisms should be developed in
order to secure the active participation of national parliaments (and regional parliaments that
have legislative powers) in the monitoring of community legislation. Legislative bodies in
Member States are particularly concerned with the implementation issue and should therefore
be willing to enhance cooperation with the European Parliament. To a certain degree, the
structures for collaboration already exist and it should be possible to use them for this
purpose.
As has been stated previously, Member States have a degree of flexibility in transposing EU
legislation into national law. Directives, by their very nature, leave Member States discretion
in choosing the form and method of implementation. Thus directives are easily integrated into
diverging national legal systems, administrative arrangements and traditions. However, at the
same time, these different national mentalities and traditions may lead to differing application
of the Directive and thus varying degrees of effectiveness. This is unacceptable in sensitive
areas such as mutual recognition of financial services, where consumers expect uniform
standards of supervision across the EU. Moreover, directives may loose their effectiveness as
a result of their transposition into national law, as a result of the problems referred to above
(e.g. linguistic difficulties, fragmented transposition), or because Member States may
deliberately choose to transpose them in a way that undermines their effectiveness. It is
therefore to be recommended that regulations and not directives be chosen as the standard
legal form to legislate on particularly sensitive issues, in order to reflect the legislator's aims
more closely.
If, however, a directive is chosen rather than a regulation, it would be advisable for it to
contain maximum harmonization requirements and not minimum standards. Directives should
lay down clear and unambiguous requirements, which leave no room for interpretation and
limit the discretion of national authorities. Derogation clauses and optional requirements
should be avoided wherever possible because they diminish the EU-wide coherence and
effectiveness of the law. This was illustrated by the option given to Member States in the 3LD
to determine whether or not non-contractual bonuses were to be reserved (1.D, article 18)1.
1
See Part II, Section II.1, for further details.
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Conclusions PART V, ROLE OF THE COMMISSION
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PART V - ROLE OF THE COMMISSION
The Commission’s role in the Equitable Life crisis
1.
The committee is of the opinion that the Commission did not monitor the application of
the 3LD effectively, although it may be said to have followed the prevailing practice at
that time. The committee believes that the Commission should have taken a much more
proactive stance and not simply have waited for complaints to arrive.
2.
The committee believes that a dynamic approach to implementation on the part of the
Commission and the Member States, considering both black letter law of the legislative
text but also the aims of the legislation and the method of its practical application, would
most likely have highlighted and brought to the fore the deficiencies in the application of
the 3LD.
3.
The committee believes that the study requested by the Commission on 3LD
transposition in the UK was unhelpful, incomplete and of poor quality and did not raise
any substantial key points, one of its main weaknesses being that it was undertaken
shortly after transposition and did not benefit from a longer period in which to evaluate
implementation over time.
4.
The committee believes that the introduction of options within the Directive diminished
its coherence and effectiveness and furthermore hindered the implementation and
application of EU law, opening the door to Member State gold-plating and differing
standards. This was illustrated by the option given to Member States in the 3LD to
choose whether non-contractual bonuses were to be reserved (Art. 18, 1.D).
Systematic weaknesses highlighted by the Inquiry
5.
The committee is of the opinion that, as has been depicted in the different Parts of this
report1, the ELAS case has brought to the surface the existence, on the part of the
Commission, of certain systematic weaknesses related to the proper monitoring of the
implementation of EU law.
6.
The committee is of the opinion that, even though the situation seems to have improved
recently, the ELAS case attests that the Commission has in the past adopted a formalistic
and static role in the monitoring of the transposition of Community law which, while it
might have been in line with the philosophy prevailing at the time, is certainly no longer
acceptable. The case of ELAS adds weight to the urgent need for a more dynamic and
comprehensive concept of implementation of EC legislation.
7.
The committee is of the opinion that the present inquiry also highlights another
systematic weakness within the Commission, namely the lack of resources in terms of
staff devoted to the monitoring of implementation. In particular, it shows how the
1
See Part V Section III, see also in Part II Section II.2.1, and Part II Section II.2.2.
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Commission relied too heavily in its monitoring on contracted consultants which, in the
ELAS case, produced an incomplete and poor quality study.
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PART VI - ROLE OF
COMMITTEES OF INQUIRY
on powers and competences of the Parliamentary Committees of Inquiry
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INDEX PART VI
I.
The committee of Inquiry: current situation
II.
Limitations of the current status
III.
Annex
Conclusions
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I.
The Committee of Inquiry: current situation.
1). The right to set up temporary Committees of Inquiry to investigate "alleged
contraventions or maladministration in the implementation of Community law", except when
the matter is sub judice, is an important element of the supervisory powers of the European
Parliament (EP), together inter alia with the examination of petitions and the appointment of
an Ombudsman.
Parliamentary committees of inquiry (PCI) enable an in-depth investigation of a particular
issue. They also focus the public spotlight on the issues under scrutiny and, in that sense, are
useful not only for placing certain topics on the political agenda but also for enhancing
Parliament's powers of scrutiny and control.
The regular practice of setting up committees of inquiry was given formal legal recognition in
the Treaty of Maastricht, which added a new article to the EC Treaty specifying that
Parliament has the right to set up such committees to investigate "alleged contraventions or
maladministration in the implementation of Community law, except where the alleged facts
are being examined by a court and while the case is still subject to legal proceedings".1
2). This new Article (today Article 193 TEC) does not provide information on the specific
powers that an EP committee of inquiry has and instead provides that the detailed provisions
are adopted by interinstitutional agreement. This agreement was reached in Decision 95/167
of the EP, the Council and the Commission of 19 April 1995 on the detailed provisions
governing the exercise of the European Parliament's right of Inquiry2.
The agreement on this Decision was reached only after two years of negotiations and
important concessions by Parliament. However, the right of inquiry of Parliament was
considerably reinforced with respect to the situation obtaining before the Treaty of
Maastricht.
3). The experience available of PCI since the adoption of the above-mentioned Decision is
limited, as only two PCIs have been set up during that period3 and, as far as is known, no indepth study has been undertaken on the powers, duties and conduct of Parliament when
exercising its right of inquiry.
1
Art. 193.
OJ L 113, 19.5.1995, p. 1.
3 Since its first direct election, Parliament has shown great interest on the committee of Inquiry. In fact, during
the first ten years after 1979, Parliament set a number of these committees, though with very limited powers.
After the 95 Decision only two committees of inquiry have been set: Committee of Inquiry into the Community
Transit System (4-0053/97) and the Committee of Inquiry in relation to BSE. Both committees followed more
or less the same pattern of work. Following the resolution of Parliament setting the mandate (in both cases much
more detailed that the one in EQUI), hearings and delegations followed. There were no interim reports. The
committee into the Community Transit System asked for a three months extension which was granted. At the
end both produced a long report and a draft recommendation that were sent to plenary. Only the short
recommendation endorsing the report was voted by plenary ( in the case of the BSD it was a resolution).
2
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The nature of a PCI was described in the explanatory statement of the PROUT report1 which
first introduced the rules regarding Inquiry committees in the Rules of Procedure. It states that
"Inquiry committees are not political committees at all. They do not look to the future and
look at the existing body of Community legislation and the way that it is implemented, either
by the Commission or by the Member States. They look to see whether there are breaches of
the law, or elements of maladministration or corruption in the administration of the law. In
other words, they assist Parliament in its supervisory role ...".
4). It appears clear from the above that the investigative nature of these type of committees
calls for precise limits to their activities and a slight extension of their powers and duties with
respect to a standing or normal temporary committee.
Scope and limits of the mandate
5). It is important to bear in mind that the scope of action of a PCI is defined by primary and
secondary law, namely Article 193 TEC, Decision 95/167, the relevant Rules of Procedure
and the mandate adopted by Parliament pursuant to Rule 176(3).
As for the Treaty, the Decision and the Rules of Procedure, Parliament may set up a
committee of Inquiry "to investigate alleged contraventions or maladministration in the
implementations of Community law" by an EU institution, a Member State or persons
empowered by Community law to implement that law. A temporary committee of inquiry
may not investigate matters being examined before a national or Community Court of law
until such time as the legal proceedings have been completed (Article 193 TCE and Article 3
of the 1995 Decision).
6). With this in mind, it is clear that the mandate becomes rather large and it is therefore
important to highlight that the abovementioned texts do not explicitly limit the scope of the
investigations to contraventions or maladministration for which Community institutions are
allegedly responsible: Member States, meaning all their bodies and administrations, are also
subject to possible investigation.
Thus the Treaty and the Decision set three limits for a PCI: it must investigate alleged
contraventions or maladministration in the implementation of Community law; these actions
should have been allegedly carried out by Community or national administrations; and it does
not have the right to investigate matters before a national or Community Court.
7). It is uncertain whether the committee can investigate a matter before a Court of a nonMember State. The Treaty makes no distinction and simply refers to "facts are being
examined before a Court" whilst the Decision in Article 2, paragraph 3, clearly refers to
national or Community Courts. There is no ECJ case-law on the subject so, in principle, it
seems that the sub judice limitation should be applied to national or Community Courts
except, perhaps, in those cases where the purpose of the litigation is to stop the investigations
of a committee of inquiry. The limitation should also be understood strictu sensu: it refers
only to the specific issue sub judice and cannot be extended to collateral or related matters.
1
A2-100/1986.
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8). The meaning of maladministration is not defined by primary or secondary community law.
However, the Ombudsman's Annual Report for 1996, responding to a request from the EP,
explains the term maladministration as follows:
Clearly there is maladministration if a Community institution or body fails to act in
accordance with the Treaties and with the Community acts that are binding upon it, or if it
fails to observe the rules and principles of law established by the Court of Justice and Court
of First Instance.
Many other instances may also amount to maladministration, including administrative
irregularities, administrative omissions, abuse of power, unfairness, malfunction or
incompetence, discrimination, avoidable delays, refusal of information, negligence, etc.1
The EP has endorsed this approach in its resolution of 16 July 19982.
9). The committee of Inquiry is also limited by its mandate, the initial purpose behind its
constitution, and its raison d'être, and cannot investigate beyond this mandate as conferred
upon it by Parliament. The decision to set up a committee of inquiry has to specify this
purpose (Article 2, paragraph 1 in fine of the 1995 Decision).
10). Finally, the committee of Inquiry is limited by the deadline for submission of its report as
specified in the mandate (Article 2, paragraph 1 in fine of the Decision). The deadline may be
no longer than 12 months from the date when it was set up but may be extended twice by
three months (Article 2, paragraph 4 of the Decision and Rule 176(4)).
Powers and duties
11). Notwithstanding what is provided by the Rules or Decision 95/167, the modus operandi
and powers of a committee of inquiry are the same as those provided for standing committees
(Rule 176 paragraph 2). When a committee considers that one of its rights has been infringed,
it shall ask the President to take the appropriate measures (Rule 176, paragraph 6).
12). The extended powers granted to a committee of inquiry are mostly found in Article 3 of
Decision 95/167. Article 3, paragraph 1 provides that a committee shall carry out the
inquiries necessary to verify alleged contraventions or maladministration. This provision has
to be read in connection with the supervisory powers as mentioned in this note. European
Community institutions and Member States are in particular obliged under Article 10 TCE to
cooperate with the committee.
13). Article 3(4) establishes that authorities of Member States, institutions and bodies of the
European Communities shall provide the committee with the necessary documents for the
performance of its duties except for well defined reasons (national security, Community
legislation, etc). Paragraphs 5, second sentence and paragraph 6 of Article 3 further clarify
this obligation to provide information (institutions shall not supply the committee with
1
2
Ombudsman's Annual Report for 1996.
OJ C 292, 21.9.1998, p. 168.
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documents originating in a Member State without first informing the State concerned).
The committee has the right to be notified of any obstacles arising out of secrecy reasons by a
representative authorised to represent the government concerned. This notification has to be
reasoned.
14). Article 3, paragraph 8 provides that insofar as it is necessary for the performance of its
duties, the committee of inquiry may request any other person (meaning persons other than
officials or civil servants or EC officials) to give evidence before it. It is quite clear that the
committee has no powers to oblige a citizen to give evidence if he or she is not